# Peapack Gladstone Financial Corp: Form 10-K for the period ended Dec 31, 2022 - Company: [Peapack Gladstone Financial Corp](/companies/pgc.md) (CIK 1050743) - Form: 10-K - Filed: 2023-03-13 - Accepted by EDGAR: Mar 13, 2023, 16:15 ET - Period: 2022-12-31 - Accession: 0000950170-23-007575 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/1050743/000095017023007575/pgc-20221231.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1050743/000095017023007575/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2022-12-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 12 months, 2022-01-01 to 2022-12-31 | $242.5m | us-gaap:Revenues | | Interest expense | 3 months, 2022-10-01 to 2022-12-31 | $16.2m | us-gaap:InterestExpense | | Interest expense | 12 months, 2022-01-01 to 2022-12-31 | $35.8m | us-gaap:InterestExpense | | Income tax | 3 months, 2022-10-01 to 2022-12-31 | $8.9m | us-gaap:IncomeTaxExpenseBenefit | | Income tax | 12 months, 2022-01-01 to 2022-12-31 | $28.1m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2022-10-01 to 2022-12-31 | $20.6m | us-gaap:NetIncomeLoss | | Net income | 12 months, 2022-01-01 to 2022-12-31 | $74.2m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2022-10-01 to 2022-12-31 | $1.12 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 12 months, 2022-01-01 to 2022-12-31 | $4.00 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2022-10-01 to 2022-12-31 | $1.15 | us-gaap:EarningsPerShareBasic | | Basic EPS | 12 months, 2022-01-01 to 2022-12-31 | $4.09 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 12 months, 2022-01-01 to 2022-12-31 | 18,568,098 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 12 months, 2022-01-01 to 2022-12-31 | $118.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 12 months, 2022-01-01 to 2022-12-31 | $3.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Dividends paid | 12 months, 2022-01-01 to 2022-12-31 | $3.6m | us-gaap:PaymentsOfDividendsCommonStock | | Share repurchases | 12 months, 2022-01-01 to 2022-12-31 | $32.7m | us-gaap:PaymentsForRepurchaseOfCommonStock | | Total assets | at 2022-12-31 | $6.35bn | us-gaap:Assets | | Total liabilities | at 2022-12-31 | $5.82bn | us-gaap:Liabilities | | Short-term borrowings | at 2022-12-31 | $379.5m | us-gaap:ShortTermBorrowings | | Shareholders' equity | at 2022-12-31 | $533.0m | us-gaap:StockholdersEquity | ## Business As filed, 36,156 characters. *The disclosures set forth in this Form 10-K are qualified by Item 1A-Risk Factors and the section captioned “Cautionary Statement Concerning Forward-Looking Statements” in Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and other cautionary statements set forth elsewhere in this report and filed by us from time to time with the Securities and Exchange Commission. The terms “Peapack,” the “Company,” “we,” “our” and “us” refer to Peapack-Gladstone Financial Corporation and its wholly-owned subsidiaries unless otherwise indicated or the context requires otherwise.* ### The Corporation Peapack-Gladstone Financial Corporation is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). The Company was organized under the laws of New Jersey in August 1997 by the Board of Directors of Peapack-Gladstone Bank (the “Bank”), its principal subsidiary. The Bank is a state chartered commercial bank founded in 1921 under the laws of the State of New Jersey. The Bank is a member of the Federal Reserve System. Through its branch network in Somerset, Morris, Hunterdon and Union counties and its private banking locations in Bedminster, Morristown, Princeton and Teaneck, its private wealth management, commercial private banking, retail private banking and residential lending divisions, along with its online platforms, Peapack-Gladstone Bank is committed to offering unparalleled client service. Our wealth management clients include individuals, families, foundations, endowments, trusts and estates. Our commercial loan clients include business owners, professionals, retailers, contractors and real estate investors. Most forms of commercial lending are offered, including working capital lines of credit, term loans for fixed asset acquisitions, commercial mortgages, multifamily mortgages and other forms of asset-based financing. In addition to commercial lending activities, we offer a wide range of consumer banking services, including checking and savings accounts, money market and interest-bearing checking accounts, certificates of deposit, and individual retirement accounts. We also offer residential mortgages, home equity lines of credit and other second mortgage loans. Automated teller machines are available at 18 locations. Internet banking, including an online bill payment option and mobile phone banking, is available to clients. ### Available Information Peapack-Gladstone Financial Corporation is a public company, and files interim, quarterly and annual reports with the Securities and Exchange Commission (the “SEC”). These reports and any amendments to these reports are available for free on the SEC’s website, www.sec.gov, and on our website, www.pgbank.com, as soon as reasonably practical after they have been filed with or furnished to the SEC. Information on our website should not be considered a part of this Annual Report on Form 10-K. ### Employees ### Human Capital Resources We believe our employees are our most important resource and are critical to our success and ability to provide outstanding service to our customers. As of December 31, 2022, we had 498 full-time and part-time employees, with 267 at our corporate headquarters, 103 in our branch offices and 128 in other locations. Our Management believes that they have good relationships with all employees. ### Hiring and Promotion We look to hire internally for positions whenever possible. When this is not the case, we look to source candidates from multiple avenues, including referrals, utilizing online platforms such as LinkedIn, Indeed, Circa, the New Jersey Department of Labor website and our own corporate website. We also post advertisements at our branch locations and reach out to local community organizations to promote open positions. Additionally, we meet with local colleges and host career workshops for students to further develop our talent pool. This approach has improved our brand awareness in the community and our ability to grow diverse hires. ### Talent Development The continuous development and succession of our employees is a primary focus for the Company. We conduct regular talent reviews for the purpose of succession planning and developing our employees. In addition to regulatory training courses, we offer ethics and subject matter training sessions regularly. On an annual basis, we offer career development, performance enhancement and leadership development opportunities. Experiential learning opportunities are also available on an individualized basis. We maintain a mentorship program and a peer recognition program in which all employees can participate. Our President and CEO hosts a biweekly company update accessible by all employees. Tuition reimbursement, up to $10,000 annually, is offered to full-time employees after completion of one year of employment and successful course completion. We conduct an annual employee engagement survey by utilizing the American Banker ‘Best Banks to Work for Survey’, a third-party survey that collects employee feedback on areas that include, but are not limited to, leadership, corporate culture and communications, training and development resources, role satisfaction, pay and benefits and overall engagement. We review the detailed results to identify areas of opportunity and develop steps to improve, as well as take actions in those areas. We invite all employees to participate and have received a high level of survey participation. Based on our survey results, we have been awarded recognition as an American Banker ‘Best Banks to Work For’ for the previous five years (2018-2022). ### Diversity, Equity and Inclusion We are an employer that champions diversity, equity and inclusion in our workplace environment. Our strategy focuses on maintaining hiring levels that are representative and in line with the communities in which we serve, as well as improving diversity representation in our senior roles. We have dedicated actions to drive a more diverse workforce, with focus in the areas of brand awareness and sourcing, recruiting and hiring, cultural awareness and appreciation, and furthering our development opportunities for all employees. Our Cultural Ambassador Committee, established in 2019, consists of non-executive employees and is sponsored by our CEO, Chief Human Resource Officer and our President of Commercial Banking. The Committee was created to sustain and evolve our corporate culture through ongoing communication, awareness, engagement and advocacy of our core principles, including diversity, inclusion and volunteerism. We have seven employee resource groups, focusing on areas such as wellness, the environment, core principles and diversity and inclusion. Additionally, we maintain an Anti-Discrimination and Harassment Policy as well as a workplace harassment training course which must be completed annually by all employees. ### Employee Health and Safety The safety, health and well-being of our employees and customers is extremely important to us. We have closely monitored the COVID-19 pandemic from its inception and followed recommendations of local and national health organizations throughout. Employees are permitted to leverage a new flexible work arrangement offered by management provided their performance remains in good standing. The combination of working remotely and in the office enables employees to continue be more productive, completing tasks with less interruption when remote, while still having the opportunity to collaborate with peers in the workplace. Virtual meeting and teleconference platforms continue to be utilized to maintain a safe and productive work environment. ### Compensation and Benefits We seek to attract, motivate and retain the best talent in a competitive marketplace by offering an attractive compensation and benefits package. Compensation includes a market competitive salary, and for eligible positions, annual incentives or cash bonuses and participation in long-term incentive awards as well as an opportunity to participate in our discounted employee stock purchase plan. Work/life balance is an important part of our culture, and in support of this we offer a broad list of benefits for eligible employees, which includes a comprehensive suite of health insurance benefits, paid time off, maternity and paternity leave, access to employee assistance programs, retirement planning and 401(k) Plan participation with a generous company match. Wellness programs are deeply embedded in our culture and other ancillary benefits such as pet insurance, identity protection coverage and supplemental insurance through Aflac are provided. ### Community Involvement We actively reinvest in our communities with the greatest needs. We encourage volunteerism, supporting organizations valued by our employees and clients. Our employees are generous with their time in their support of local organizations. In 2022, we contributed over 1,625 hours of service and financial support to over 245 charitable organizations. We are proud to be known and recognized locally and nationally for our community involvement. ### Peapack-Gladstone Bank’s Private Wealth Management Division (“Peapack Private”) Peapack Private is a New Jersey-chartered trust and investment business with $10 billion of assets under management and/or administration as of December 31, 2022. It is headquartered in Bedminster, New Jersey with additional private banking locations throughout New Jersey in Morristown, Princeton, Red Bank, Summit and Teaneck, New Jersey, as well as at the Bank’s subsidiary, PGB Trust & Investments of Delaware, in Greenville, Delaware. Peapack Private is known for its integrity, client service and broad range of fiduciary, investment management and tax services, designed specifically to meet the needs of high net-worth individuals, families, foundations and endowments. Our wealth management business differentiates us from our competition and adds significant value. We intend to grow this business further, both in and around our market; through our existing wealth, loan and depository client base through our innovative private banking service model, which utilizes private bankers working together to provide fully integrated client solutions; and through potential acquisitions of complimentary wealth management businesses. Throughout the wealth management division and all other business lines, we will continue to provide the unparalleled personalized, high-touch service our valued clients have come to expect. ### Our Markets Our current market is defined as the New Jersey, New York, and Pennsylvania metropolitan statistical area, with our primary market areas being in New Jersey and New York. According to estimates from the United States Census Bureau, as of 2017-2021, New Jersey had a total population exceeding 9.3 million and a median household income of $89,703, and Somerset County, where we are headquartered, is one of the wealthiest counties in New Jersey, with a median household income of $121,695; compared to a U.S. median household income of $69,021. We believe that these markets have economic and competitive dynamics that are consistent with our objectives and favorable to executing our growth strategy. ### Competition We operate in a market area with a high concentration of banking and financial institutions and we face substantial competition in attracting deposits and in originating loans and leases. A number of our competitors are significantly larger institutions with greater financial and managerial resources and lending limits. Our ability to compete successfully is a significant factor affecting our growth potential and profitability. Our competition for deposits, loans and leases historically has come from other insured financial institutions such as local and regional commercial banks, savings institutions, leasing companies and credit unions located in our primary market area. We also compete with mortgage banking and finance companies for real estate loans and with commercial banks, savings institutions and credit unions for consumer loans. The Company also faces direct competition for wealth and advisory services from registered investment advisory firms and investment management companies. ### Our Business Strategy In 2022, we initiated the “Refining Our Strategy” phase of our Strategic Plan, a natural evolution of the groundwork set forth in 2013. Almost ten years after the launch and successful execution of the “Expanding Our Reach” strategy, we recognized refinements were necessary to address several industry headwinds that assume: - margin pressure is likely to continue for the foreseeable future given the expansion of digital banks and nature of economic cycles, including the current economic climate with a prolonged inversion of the yield curve, rapid rise in interest rates, and intense competition for deposits, especially locally; - costs associated with compliance, risk management and cybersecurity would continue to increase significantly, and the increasing utilization of technology externally by clients and internally by banks would require significant investment to remain competitive and demand higher returns on capital; - our clients have become so accustomed to automation and technology, which only accelerated because of the COVID-19 pandemic, that there would continue to be a shift from transactions in traditional branches in favor of electronic delivery channels; and - given the technology evolution and resulting pressure from a competitive standpoint, strong and updated technology is a requirement, but our differentiation must be in the level and quality of service we provide. The key elements of our business strategy include: - a robust wealth management business that provides a diversified and stable source of revenue over time, through organic growth and through strategic acquisitions; - an emphasis on commercial banking with private bankers focused on providing high-touch client service through an advice-based approach encompassing corporate and industrial (“C&I”) lending (including equipment finance lending and leasing), wealth management, insurance premium financing, depository services, electronic banking, Small Business Administration (“SBA”) loans, other commercial real estate lending, and corporate advisory services; - a unified “One Company” culture heavily focused on unparalleled “white glove” customer service designed and centered around best-in-class hospitality standards and delivered by experienced industry professionals across all business lines; - highly efficient branch network and deposit gathering processes; - robust risk management processes, including, but not limited to, active loan portfolio, capital, liquidity, and interest rate risk stress testing; and - a focus on the communities which we serve with a strong commitment to community service and involvement. ### Governmental Policies and Legislation The banking industry is highly regulated. Statutory and regulatory controls increase a bank holding company’s cost of doing business and limit the options of its management to deploy assets and maximize income. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, in state legislatures and before various bank regulatory agencies. The likelihood of any major changes and the impact such changes might have on the Company or the Bank is impossible to predict. The following description is not intended to be complete and is qualified in its entirety to applicable laws and regulations. ### Bank Regulation As a New Jersey-chartered commercial bank, the Bank is subject to the regulation, supervision, and examination by the New Jersey Department of Banking and Insurance (“NJDOBI”). As a Federal Reserve-member bank, the Bank is also subject to the regulation, supervision and examination by the Federal Reserve Board (“FRB”) as its primary federal regulator. The regulations of the FRB and the NJDOBI impact virtually all of our activities, including the minimum levels of capital we must maintain, our ability to pay dividends, our ability to expand through new branches or acquisitions and various other matters. ### Holding Company Supervision The Company is a bank holding company and periodically examined within the meaning of the Bank Holding Company Act. As a bank holding company, the Company is supervised by the FRB and is required to file reports with the FRB and provide such additional information as the FRB may require. The Bank Holding Company Act prohibits the Company, with certain exceptions, from (i) acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company that is not a bank and (ii) from engaging in any business other than banking, managing and controlling banks, or furnishing services to subsidiary banks, However, the Company may apply to engage in, or own shares of companies engaged in, certain businesses found by the FRB to be so closely related to banking “as to be a proper incident thereto.” The Bank Holding Company Act requires prior approval by the FRB of the acquisition by the Company of more than five percent of the voting stock of any additional bank. Generally, federal regulatory approval to make acquisitions requires prerequisites including satisfactory capital ratios, Community Reinvestment Act ratings and anti-money laundering policies. Federal law provides that a bank holding company must act as a source of financial strength to its subsidiary bank and commit resources to support the subsidiary bank in circumstances in which it might not do so absent that law. Acquisitions through the Bank require the approval of the FRB and the NJDOBI. ### The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 The Dodd-Frank Wall Street Report and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) significantly changed bank regulation and affected the lending, investment, trading and operating activities of depository institutions and their holding companies. The Dodd-Frank Act also created a Consumer Financial Protection Bureau (the “CFPB”) with extensive powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB also has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, such as the Bank, continue to be examined by their applicable federal bank regulators. ### Capital Requirements Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), each federal banking agency has promulgated regulations, specifying the levels at which a financial institution would be considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” and to take certain mandatory and discretionary supervisory actions based on the capital level of the institution. FRB regulations require member banks to meet several minimum capital standards established by the federal banking agencies, which are based on the final capital framework for strengthening international capital standards, known as Basel III, of the Basel Committee on Banking Supervision: a common equity Tier 1 (“CET1”) capital to risk-based assets ratio of 4.5 percent, a Tier 1 capital to risk-based assets ratio of 6.0 percent, a total capital to risk-based assets of 8.0 percent, and a 4.0 percent Tier 1 capital to total assets leverage ratio. CET1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as CET1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. The capital requirements also require the Company and the Bank to maintain a 2.5 percent “capital conservation buffer,” composed entirely of CET1, on top of the minimum risk-weighted asset ratios, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7.0 percent, (ii) Tier 1 capital to risk-weighted assets of at least 8.5 percent, and (iii) total capital to risk-weighted assets of at least 10.5 percent. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of (i) CET1 to risk-weighted assets, (ii) Tier 1 capital to risk-weighted assets or (iii) total capital to risk-weighted assets above the respective minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and discretionary bonus payments to executive officers based on the amount of the shortfall. Bank holding companies with greater than $3 billion in total consolidated assets are subject to consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions. The Company and the Bank were in compliance with the capital requirements, including the capital conservation buffer, as of December 31, 2022. Federal law requires that federal bank regulatory authorities take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. The FRB maintains regulations to implement the prompt corrective action legislation. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0 percent or greater, a Tier 1 risk-based capital ratio of 8.0 percent or greater, a leverage ratio of 5.0 percent or greater and a CET1 ratio of 6.5 percent or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0 percent or greater, a Tier 1 risk-based capital ratio of 6.0 percent or greater, a leverage ratio of 4.0 percent or greater and a CET1 ratio of 4.5 percent or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0 percent, a Tier 1 risk-based capital ratio of less than 6.0 percent, a leverage ratio of less than 4.0 percent or a CET1 ratio of less than 4.5 percent. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0 percent, a Tier 1 risk-based capital ratio of less than 4.0 percent, a leverage ratio of less than 3.0 percent or a CET1 ratio of less than 3.0 percent. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0 percent. The Company and the Bank’s capital ratios were all above the minimum levels required for it to be considered a “well capitalized” financial institution at December 31, 2022 under the “prompt corrective action” regulations in effect as of such date. The Economic Growth Regulatory Relief and Consumer Protection Act of 2018 (the "Relief Act") required that the federal banking agencies, including the FRB, establish a “community bank leverage ratio” of between 8-10 percent of average total consolidated assets for qualifying institutions with less than $10 billion of assets. Pursuant to federal legislation enacted in 2020, the community bank leverage ratio was set at 9 percent for 2022 and thereafter. Institutions with tangible equity (subject to certain adjustments) meeting the specified level and electing to follow the alternative framework would be deemed to comply with the applicable regulatory capital requirements, including the risk-based requirements, and be considered to be “well-capitalized.” The Bank has not elected to measure its capital adequacy using the community bank leverage ratio. ### Insurance of Deposit Accounts The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. Deposit accounts in the Bank are insured up to $250,000 for each separately insured depositor. The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance Fund. Under the risk-based assessment system, institutions deemed less risky of failure pay lower assessments. Assessments for institutions of less than $10 billion of assets are based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of an institution’s failure within three years. Assessment rates for institutions of the Bank’s size ranged from 1.5 to 30 basis points effective through December 31, 2022. The FDIC has authority to increase insurance assessments and adopted a final rule in October 2022 to increase initial base deposit insurance assessment rates by 2 basis points beginning in the first quarterly assessment period of 2023. As a result, effective January 1, 2023, assessment rates for institutions of the Bank’s size will range from 2.5 to 32 basis points. An insured institution’s deposit insurance may be terminated by the FDIC upon an administrative finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or regulatory condition imposed in writing. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance. ### Community Reinvestment Act Pursuant to the Community Reinvestment Act (the “CRA”), under federal and New Jersey law, the Bank is obligated, consistent with safe and sound banking practices, to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The FRB and NJDOBI periodically assess the Bank’s record of performance under the CRA and issue one of the following ratings: “Outstanding,” “Satisfactory,” “Needs to Improve,” or “Substantial Noncompliance.” The most recently completed evaluation of the Bank’s performance under the CRA was conducted by the FRB in 2021 and resulted in an overall rating of “Satisfactory.” ### Privacy Federal banking regulators, as required under the Gramm-Leach-Bliley Act, have adopted rules limiting the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to non-affiliated third parties. The privacy provisions of the Gramm-Leach-Bliley Act affect how consumer information is transmitted through diversified financial services companies and conveyed to outside vendors. In November 2021, the federal bank regulatory agencies issued a final rule requiring banking organizations to notify their primary federal regulator as soon as possible and no later than 36 hours of determining that a “computer-security incident” that rises to the level of a “notification incident,” as those terms are defined in the final rule, has occurred. A notification incident is a “computer-security incident” that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, the banking organization’s ability to deliver services to a material portion of its customer base, jeopardize the viability of key operations of the banking organization, or impact the stability of the financial sector. The final rule also requires bank service providers to notify any affected bank to or on behalf of which the service provider provides services “as soon as possible” after determining that it has experienced an incident that materially disrupts or degrades, or is reasonably likely to materially disrupt or degrade, covered services provided to such bank for four or more hours. The rule was effective April 1, 2022, with compliance required by May 1, 2022. ### Restrictions on the Payment of Dividends The holders of the Company’s common stock are entitled to receive dividends, when, as and if declared by the Board of Directors of the Company out of funds legally available. Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The Company is also subject to FRB policies, which may, in certain circumstances, limit its ability to pay dividends. FRB policy is that a bank holding company should pay cash dividends only out of current earnings and only if the prospective rate of earnings retention is consistent with the company’s capital needs, asset quality and overall financial condition. In addition, FRB guidance sets forth the supervisory expectation that bank holding companies will inform and consult with FRB staff in advance of issuing a dividend that exceeds earnings for the quarter and should inform the FRB and should eliminate, defer or significantly reduce dividends if: (i) net income available to stockholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall current and prospective financial condition; or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The FRB policies require, among other things, that a bank holding company must maintain a minimum capital base and serve as a source of strength to its subsidiary bank. The FRB by supervisory letters has advised holding corporations that it is has supervisory concerns when the level of dividends is too high and would seek to prevent dividends if the dividends paid by the holding company exceeded its earnings. The FRB would most likely seek to prohibit any dividend payment that would reduce a holding company’s capital below these minimum amounts. FRB policy also provides for regulatory review prior to a holding company (i) redeeming or repurchasing regulatory capital instruments when the holding company is experiencing financial weaknesses, or (ii) redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction as of the end of a quarter in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. In addition, the FRB staff has recently begun interpreting its regulatory capital regulations to require holding companies to receive FRB approval prior to any repurchases or redemptions of its common shares. Since the principal source of income for the Company are dividends paid to the Company by the Bank, the Company’s ability to pay dividends to its shareholders will depend on whether the Bank pays dividends to it. As a practical matter, restrictions on the ability of the Bank to pay dividends act as restrictions on the amount of funds available for the payment of dividends by the Company. As a New Jersey chartered commercial bank, the Bank is subject to the restrictions on the payment of dividends contained in the New Jersey Banking Act of 1948, as amended (the “Banking Act”). Under the Banking Act, the Bank may pay dividends only out of retained earnings, to the extent that surplus exceeds 50 percent of stated capital. Federal law may also limit the amount of dividends that may be paid by the Bank. Under the Financial Institutions Supervisory Act, the FDIC has the authority to prohibit a state-chartered bank from engaging in conduct that, in the FDIC’s opinion, constitutes an unsafe or unsound banking practice. Under certain circumstances, the FDIC could claim that the payment of a dividend or other distribution by the Bank to the Company constitutes an unsafe or unsound practice. ### Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 was enacted to address, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. We have existing policies, procedures and systems designed to comply with these regulations. ### Other Laws and Regulations Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s operations are also subject to federal laws (and their implementing regulations) applicable to credit transactions, such as the: - Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; - Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one- to four-family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services; - Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; - Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; - Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies; - Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and - Truth in Savings Act, prescribing disclosure and advertising requirements with respect to deposit accounts. The operations of the Bank also are subject to the: - Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; - Electronic Funds Transfer Act and Regulation E promulgated thereunder, governing automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; - Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check; - USA PATRIOT Act, which requires institutions operating to, among other things, establish broadened anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and - Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and the opportunity to “opt out” of having certain personal financial information shared with unaffiliated third parties. ## Risk factors As filed, 48,012 characters. The material risks and uncertainties that Management believes affect the Company are described below. These risks and uncertainties are not the only ones affecting the Company. Additional risks and uncertainties that Management is not aware of or focused on or that Management currently deems immaterial may also affect the Company’s business operations. This report is qualified in its entirety by these risk factors. If any one or more of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected. ### Risks Related to the COVID-19 Pandemic ***The economic impact of the COVID-19 pandemic could adversely affect our financial condition and results of operations.*** The COVID-19 pandemic caused significant economic dislocation in the United States as many state and local governments have placed restrictions on businesses and residents. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including the advent of new variants, governmental responses and when the coronavirus can be controlled and abated. Prolonged measures by public health or other governmental authorities encouraging or requiring significant restrictions on travel, assembly, or other core business practices could harm our business and that of our customers, in particular small to medium-sized business customers. A decline in economic conditions generally and a prolonged negative impact on small to medium-sized businesses, in particular, due to the COVID-19 pandemic could result in a material adverse effect on our business, financial condition, and results of operations and may heighten many of the known risks described herein and in other filings with the SEC. ### Risks Relating to Regulatory Matters ***The Dodd-Frank Wall Street Reform and Consumer Protection Act has and may continue to adversely affect our business activities, financial position and profitability by increasing our regulatory compliance burden and associated costs, placing restrictions on certain products and services, and limiting our future capital raising strategies.*** The Dodd-Frank Act has and may continue to increase our regulatory compliance burden. Among the Dodd-Frank Act’s significant regulatory changes, it created the CFPB which is empowered to promulgate new consumer protection regulations and revise existing regulations in many areas of consumer protection. Moreover, the Dodd-Frank Act permits states to adopt stricter consumer protection laws and state attorney generals may enforce consumer protection rules issued by the CFPB. These changes have increased, and may continue to increase, our regulatory compliance burden and costs and may restrict the financial products and services we offer to our clients. The Dodd-Frank Act also increased regulation of derivatives and hedging transactions, which could limit our ability to enter into, or increase the costs associated with, interest rate and other hedging transactions. ### Government regulation significantly affects our business. The banking industry is extensively regulated. Banking regulations are intended primarily to protect depositors, and the FDIC deposit insurance fund, not the shareholders of the Company. We are subject to regulation and supervision by the New Jersey Department of Banking and Insurance and the Federal Reserve Bank. Such regulation and supervision governs the activities in which an institution and its holding company may engage. The bank regulatory agencies possess broad authority to prevent or remedy unsafe or unsound practices or violations of law Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on operations, the classification of assets and determination of the level of the allowance for credit losses. Regulatory requirements affect our lending practices, capital structure, investment practices, dividend policy and growth. In addition, changes in laws, regulations and regulatory practices affecting the banking industry may limit the manner in which we conduct our business. Such changes may adversely affect us, including our ability to offer new products and services, obtain financing, attract deposits, make loans and achieve satisfactory spreads and may impose additional costs on us. The Bank is also subject to a number of federal laws, which, among other things, require it to lend to various sectors of the economy and population, and establish and maintain comprehensive programs relating to anti-money laundering and customer identification. The Bank's compliance with these laws will be considered by the federal banking regulators when reviewing bank merger and bank holding company acquisitions or commencing new activities or making new investments in reliance on the Gramm-Leach-Bliley Act. As a public company, we are also subject to the corporate governance standards set forth in the Sarbanes-Oxley Act, as well as any rules or regulations promulgated by the SEC and the NASDAQ Stock Market. ***Monetary policies and regulations of the Federal Reserve Board could adversely affect the Company’s business, financial condition, and results of operations.*** The Company’s earnings and growth are affected by the policies of the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve Board to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against certain transaction account deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits. The monetary policies and regulations of the Federal Reserve Board have a significant effect on the overall economy and the operating results of financial institutions. ### Risks Related to Economic Matters ***Negative developments in the financial services industry and U.S. and global credit markets may adversely impact our operations and results.*** Our businesses and operations, which primarily consist of lending money, borrowing money from clients in the form of deposits and investing in securities, are sensitive to general business and economic conditions in the United States. If the U.S. economy weakens, our growth and profitability from our lending, deposit and investment operations could be constrained. Uncertainty about the federal fiscal policymaking process and the medium and long-term fiscal outlook of the federal government is a concern for businesses, consumers and investors in the United States. In addition, economic conditions in foreign countries could affect the stability of global financial markets, which could hinder U.S. economic growth. Weak economic conditions or a return of recessionary conditions and/or negative developments in the domestic and international credit markets are often characterized by deflation, fluctuations in debt and equity capital markets, a lack of liquidity and/or depressed prices in the secondary market for mortgage loans, increased loan delinquencies, real estate price declines and lower home sales and commercial activity. Our business is also significantly affected by monetary and related policies of the U.S. federal government and its agencies. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control. Adverse economic conditions and government policy responses to such conditions could have a material adverse effect on our business, financial condition, results of operations and prospects. Further, a U.S. government debt default would have a material adverse impact on our business and financial performance, including a decrease in the value of Treasury bonds and other government securities held by us, which could negatively impact the Bank’s capital position and its ability to meet regulatory requirements. Other negative impacts could be volatile capital markets, an adverse impact on the U.S. economy and the U.S. dollar, as well as increased default rates among borrowers in light of increased economic uncertainty. Some of these impacts might occur even in the absence of an actual default but as a consequence of extended political negotiations around the threat of such a default and a government shutdown. ***We are more sensitive to adverse changes in the local economy than our more geographically diversified competitors.*** Unlike larger regional banks that operate in large geographies, much of our business is with clients located within Central and Northern New Jersey, as well as New York City. Our business loans are generally made to small to mid-sized businesses, most of whose success depends on the regional economy. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. Due to our geographic concentration, a downturn in the local economy could make it more difficult to attract deposits and could cause higher losses and delinquencies on our loans than if the loans were more geographically diversified. Adverse economic and business conditions in our market area could reduce our growth, affect our borrowers' ability to repay their loans and, consequently, adversely affect our financial condition and performance. Further, we place substantial reliance on real estate as collateral for our loan portfolio. A sharp downturn in real estate values in our market area could leave our loans under-secured, which could adversely affect our earnings. ***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. Sustained higher interest rates by the Federal Reserve Board to tame persistent inflationary price pressures could also push down asset prices and weaken economic activity. A deterioration in economic conditions in the United States and our markets could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for our products and services, all of which, in turn, would adversely affect our business, financial condition and results of operations. 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. ### Risks Related to Lending Matters ***Our exposure to credit risk could adversely affect our earnings and financial condition.*** There are certain risks inherent in making loans, including risks that the principal of or interest on the loan will not be repaid timely or at all or that the value of any collateral securing the loan will be insufficient to cover our outstanding exposure. These risks may be affected by the strength of the borrower’s business and local, regional and national market and economic conditions. Our risk management practices, such as monitoring the concentration of our loans within specific industries and our credit approval practices, may not adequately reduce credit risk, and our credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting clients and the quality of the loan portfolio. Finally, many of our loans are made to small- and medium-sized businesses that are less able to withstand competitive, economic and financial pressures than larger borrowers. A failure to effectively measure and limit the credit risk associated with our loan portfolio could have a material adverse effect on our business, financial condition, results of operations and prospects. ***If our allowance for credit losses is not sufficient to cover actual loan losses, our earnings would decrease.*** We maintain allowances for credit losses on loans and off-balance sheet credit exposures. The amount of each allowance account represents management's best estimate of current expected credit losses on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current economic conditions, and reasonable and supportable forecasts. As a result, the determination of the appropriate level of allowance for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates related to current and expected future credit risks and trends, all of which may undergo material changes. Continuing deterioration in economic conditions, including the possibility of a recession, affecting borrowers and securities issuers; inflation; rising interest rates; new information regarding existing loans, credit commitments and securities holdings; the effects of the COVID-19 pandemic or other global pandemics; natural disasters and risks related to climate change; and identification of additional problem loans ratings downgrades and other factors; both within and outside of our control, may require an increase in the allowances for credit losses on loans and off-balance sheet credit exposures. In addition, bank regulatory agencies periodically review our allowance for credit losses and may require an increase in credit loss expense or the recognition of further loan charge-offs, based on judgments different than those of management. Furthermore, if any charge-offs related to loans or off-balance sheet credit exposures in future periods exceed our allowances for credit losses on loans or off-balance sheet credit exposures, we will need to recognize additional credit loss expense to increase the applicable allowance. Any increase in the allowance for credit losses on loans and/or off-balance sheet credit exposures will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on our business, financial condition and results of operations. ***Our commercial real estate loan and commercial C&I portfolios expose us to risks that may be greater than the risks related to our other mortgage loans.*** Our loan portfolio includes non-owner-occupied commercial real estate loans for individuals and businesses for various purposes. The repayment of these loans typically depends upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service. This may be adversely affected by changes in the economy or local market conditions. These loans expose us to greater credit risk than loans secured by residential real estate because the collateral securing these loans typically cannot be liquidated as easily as residential real estate. If we foreclose on these loans, our holding period for the collateral typically is longer than for a single or multifamily residential property because there are fewer potential purchasers of the collateral. Additionally, non-owner-occupied commercial real estate loans generally involve relatively large balances to single borrowers or related groups of borrowers. Accordingly, charge-offs on non-owner-occupied commercial real estate loans may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios. Unexpected deterioration in the credit quality of our commercial real estate loan portfolio may require us to increase our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition, results of operations and prospects. The source of repayment of C&I loans is typically the cash flows of the borrowers’ businesses. These loans may involve greater risk because the availability of funds to repay each loan depends substantially on the success of the business itself. The collateral securing the loans and leases often depreciates over time, is difficult to appraise and liquidate and fluctuates in value based on the success of the business. In addition, many commercial business loans have a variable rate which is indexed off of a floating rate such as the U.S. Prime Rate or the London Interbank Offer Rate (“LIBOR”). If interest rates rise, the borrower's debt service requirement may increase, negatively impacting the borrower's ability to service their debt. ***The level of the commercial real estate loan portfolio may subject the Bank to additional regulatory scrutiny.*** The federal bank regulatory agencies have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under the guidance, a financial institution that, like the Bank, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may be subject to this guidance if, among other factors, (i) total reported loans for construction, land acquisition and development and other land represent 100 percent or more of total capital, or (ii) total reported loans secured by multi-family and non-farm residential properties, loans for construction, land acquisition and development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300 percent or more of total capital. Based on these factors, the Bank has a concentration in commercial real estate lending, as such loans represented 392 percent of total bank capital as of December 31, 2022. The guidance focuses on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or in an abundance of caution). The guidance assists banks in developing risk management practices and determining capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. While it is management’s belief that policies and procedures with respect to the Bank’s commercial real estate loan portfolio have been implemented consistent with this guidance, bank regulators could require that additional policies and procedures be implemented consistent with their interpretation of the guidance that may result in additional costs or that may result in the curtailment of commercial real estate lending that would adversely affect the Bank’s loan originations and profitability. ***We are subject to environmental liability risk associated with our lending activities.*** In the course of our business, we may purchase real estate or foreclose on and take title to real estate. As a result, we could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation or clean-up costs incurred by these parties in connection with environmental contamination. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. Any significant environmental liabilities could cause a material adverse effect on our business, financial condition, results of operations and prospects. ### Risks Related to Interest Rates ***Changes in interest rates may adversely affect our earnings and financial condition.*** Our net income depends primarily upon our net interest income. Net interest income is the difference between interest income earned on loans, investments and other interest-earning assets and the interest expense incurred on deposits and borrowed funds. Different types of assets and liabilities may react differently, and at different times, to changes in market interest rates. We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities. That means either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets, an increase in market rates of interest could reduce our net interest income. Likewise, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce our net interest income. We are unable to predict changes in market interest rates, which are affected by many factors beyond our control, including inflation, recession, unemployment, money supply, governmental policy, domestic and international events and changes in the United States and other financial markets. In addition, changes in interest rates can affect the average life of loans and investment securities. A reduction in interest rates causes increased prepayments of loans and mortgage-backed securities as borrowers refinance their debt to reduce their borrowing costs. This creates reinvestment risk, which is the risk that the Bank may not be able to reinvest the funds from faster prepayments at rates that are comparable to the rates earned on the prepaid loans or securities. Conversely, an increase in interest rates generally reduces prepayments. Additionally, increases in interest rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable-rate loans. Changes in interest rates may also affect the current estimated fair value of the securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. Unrealized net losses on securities available-for-sale are reported as a separate component of stockholders’ equity. To the extent interest rates increase and the value of the available-for-sale portfolio decreases, stockholders’ equity will be adversely affected. During the year ended December 31, 2022, we incurred other comprehensive losses of $71.1 million related to net changes in unrealized holding losses in the available-for-sale investment securities portfolio. ***The reversal of the historically low interest rate environment may adversely affect our net interest income and profitability.*** The Federal Reserve Board decreased benchmark interest rates significantly, to near zero, in response to the COVID-19 pandemic. The Federal Reserve Bord has reversed its policy of near zero interest rates given its concerns over inflation. Market interest rates have risen in response to the Federal Reserve Board’s recent rate increases. The increase in market interest rates may have an adverse effect on our net interest income and profitability. ### Other Risks Related to Our Business ***We are exposed to the risks of public health issues, natural disasters, severe weather, acts of war or terrorism, government shutdowns, geopolitical events and other potential external events.*** We are exposed to the risks of public health issues, natural disasters, pandemics, severe weather, acts of war or terrorism, and other potential external events, any of which could have a significant impact on the Company’s ability to conduct business. In addition, such events could: impair the ability of borrowers to qualify for loans and/or repay their obligations, impair the value of collateral securing loans, cause depositors to withdraw funds, cause wealth management clients to withdraw assets under management, and/or cause the Company to incur additional expenses. Further, any of these events could affect the financial markets in general, causing a diminishment in the market value of assets under management for our wealth management clients and/or cause a yield curve not advantageous to the Company or the banking industry in general. Any of the above could have a material adverse effect on the Company’s financial condition and/or results of operations. Additionally, financial markets may be adversely affected by the current or anticipated impact of military conflict, including escalating military tension between Russia and Ukraine, terrorism or other geopolitical events. ***Uncertainty surrounding the future of LIBOR may affect the fair value and return on the Company's financial instruments that use LIBOR as a reference rate.*** We hold assets, liabilities, and derivatives that are indexed to the various tenors of LIBOR. The LIBOR yield curve is also utilized in our fair value calculation. The reform of major interest benchmarks led to the announcement of the United Kingdom’s Financial Conduct Authority, the regulator of the LIBOR index, that LIBOR would not be supported in its current form after the end of 2021. The use of LIBOR in new contracts was discontinued after December 31, 2021, although certain USD LIBOR tenors will continue to be published on a representative basis until June 30, 2023. We believe the U.S. financial sector will maintain an orderly and smooth transition to new interest rate benchmarks of which we will evaluate and adopt if appropriate. While in the U.S., the Alternative Rates Committee of the FRB and Federal Reserve Bank of New York have identified the Secured Overnight Financial Rate (“SOFR”) as an alternative U.S. dollar reference interest rate, it is too early to predict the financial impact this rate index replacement may have, if at all. ### Risks Related to Capital ***We may need to raise additional capital in the future, which may not be available when needed or available on acceptable terms.*** The Company is required by federal regulatory authorities to maintain adequate levels of capital to support its operations. The Company may at some point need to raise additional capital to support continued growth. The Company’s ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside the Company’s control, and on its financial performance. Accordingly, the Company cannot be assured of its ability to raise additional capital if needed or on terms acceptable to the Company. If the Company cannot raise additional capital when needed, the ability to further expand its operations could be materially impaired. Further, if we raise capital through the issuance of additional shares of our common stock, it would dilute the ownership interests of existing shareholders and may dilute the per share book value of our common stock. New investors may also have rights, preferences and privileges senior to our current shareholders, which may adversely impact our current shareholders. ***We are subject to certain capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares.*** A financial institution and its holding company, such as the Bank and the Company, is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the required amounts. These limitations establish a maximum percentage of eligible retained income that can be utilized for such actions. The application of more stringent capital requirements could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets. See Part I, Item1, “Business - Capital Requirements.” ### Our ability to pay dividends to our common shareholders is limited by law. Since the principal source of income for the Company is dividends paid to the Company by the Bank, the Company’s ability to pay dividends to its shareholders will depend on whether the Bank pays dividends to it. As a practical matter, restrictions on the ability of the Bank to pay dividends act as restrictions on the amount of funds available for the payment of dividends by the Company. As a New Jersey-chartered commercial bank, the Bank is subject to the restrictions on the payment of dividends contained in the New Jersey Banking Act of 1948, as amended. Under the Banking Act, the Bank may pay dividends only out of retained earnings, and out of surplus to the extent that surplus exceeds 50 percent of stated capital. The Company is also subject to Federal Reserve Board policies, which may, in certain circumstances, limit its ability to pay dividends. The Federal Reserve Board policies require, among other things, that a bank holding company maintain a minimum capital base and the Federal Reserve Board in supervisory guidance has cautioned bank holding companies about paying out too much of their earnings in dividends and has stated that banks should not pay out more in dividends than they earn. The Federal Reserve Board would most likely seek to prohibit any dividend payment that would reduce a holding company's capital below these minimum amounts. ### Risks Related to Liquidity ***Limits on our ability to use brokered deposits as part of our funding strategy may adversely affect our ability to grow.*** A “brokered deposit” is any deposit that is obtained from or through the mediation or assistance of a deposit broker, which includes larger correspondent banks and securities brokerage firms. These deposit brokers attract deposits from individuals and companies throughout the country and internationally whose deposit decisions are based almost exclusively on obtaining the highest interest rates. At December 31, 2022, brokered deposits represented approximately 1.7 percent of our total deposits and equaled $86.0 million, comprised of the following: interest-bearing demand-brokered of $60.0 million, and brokered certificates of deposits of $25.4 million. To continue to maintain our level of brokered deposits, we may be forced to pay higher interest rates than contemplated by our asset-liability pricing strategy. In addition, banks that become less than “well capitalized” under applicable regulatory capital requirements may be restricted in their ability to accept or prohibited from accepting brokered deposits. If this funding source becomes more difficult or expensive to access, we will have to seek alternative funding sources in order to continue to fund our growth. This may include increasing our reliance on Federal Home Loan Bank borrowings, attempting to attract non-brokered deposits, reducing our available for sale securities portfolio or selling loans. There can be no assurance that brokered deposits will be available, or if available, sufficient to support our continued growth. ### We may lose lower-cost funding sources, which may affect our profitability. Checking, savings, and money market deposit account balances and other forms of client deposits can decrease when clients perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. If clients move money out of bank deposits and into other investments, we would lose a relatively low-cost source of funds and have to replace them with higher cost funds, thus increasing our funding costs and reducing our net interest income and net income. The Bank does have certain deposits with high dollar balances which are subject to volatility. Customers with large average deposits may move these deposits for operational needs, investment opportunities or other reasons, which could require the Bank to pay higher interest rates to retain these deposits or use higher rate borrowings as an alternative funding source. ***A lack of liquidity could adversely affect the Company’s financial condition and results of operations.*** Liquidity is essential to the Company’s business. The Company relies on its ability to generate deposits and effectively manage the repayment and maturity schedules of loans to ensure that there is adequate liquidity to fund its operations. An inability to raise funds through deposits, borrowings, the sale and maturities of loans and securities and other sources could have a substantial negative effect on liquidity. The Company’s most important source of funds is deposits. Deposit balances can decrease when customers perceive alternative investments as providing a better risk/return tradeoff, which are strongly influenced by such external factors as the direction of interest rates, local and national economic conditions and the availability and attractiveness of alternative investments. Further, the demand for deposits may be reduced due to a variety of factors such as demographic patterns, changes in customer preferences, reductions in consumers’ disposable income, the monetary policy of the FRB or regulatory actions that decrease customer access to particular products. If customers move money out of bank deposits and into other investments such as money market funds, the Company would lose a relatively low-cost source of funds, which would increase its funding costs and reduce net interest income. Any changes made to the rates offered on deposits to remain competitive with other financial institutions may also adversely affect profitability and liquidity. Other primary sources of funds consist of cash flows from operations, maturities and sales of investment securities and borrowings from the FHLB of New York. The Company also has an available line of credit with the FRB discount window. The Company also may borrow funds from third-party lenders, such as other financial institutions. The Company’s access to funding sources in amounts adequate to finance or capitalize its activities, or on terms that are acceptable, could be impaired by factors that affect the Company directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry, a decrease in the level of the Company’s business activity as a result of a downturn in markets or by one or more adverse regulatory actions against the Company. Any decline in available funding could adversely impact the Company’s ability to originate loans, invest in securities, meet expenses, or to fulfill obligations such as repaying borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on its liquidity, business, financial condition and results of operations. ### Risks Related to Competition ***Competition from other financial institutions in originating loans and attracting deposits may adversely affect our profitability.*** We face substantial competition in originating loans from other banks, savings institutions, credit unions, mortgage banking companies and other lenders. Many of our competitors enjoy advantages, including greater financial resources and higher lending limits, a wider geographic presence, and more accessible branch office locations. In attracting deposits, we face substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of our competitors enjoy advantages, including greater financial resources, more aggressive marketing campaigns, better brand recognition and more branch locations. These competitors may offer higher interest rates than we do, which could decrease the deposits that we attract or require us to increase our rates to retain existing deposits or attract new deposits. We also compete with non-bank providers of financial services, such as brokerage firms, consumer finance companies, insurance companies and governmental organizations, which may offer more favorable terms. Some of our non-bank competitors are not subject to the same extensive regulations that govern our operations. As a result, such non-bank competitors may have advantages over us in providing certain products and services. This competition may reduce or limit our margins on banking services, reduce our market share and adversely affect our earnings and financial condition. ### Risks Related to Operational Matters ***Cyber-attacks and information security breaches could compromise our information or result in the data of our customers being improperly divulged, which could expose us to liability and losses.*** Many financial institutions and companies engaged in data processing have reported significant breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks and other means. We are subject to such cyber-attacks or other information security breaches, which could result in losses. Additionally, our risk exposure to security matters may remain elevated or increase in the future due to, among other things, the increasing size and prominence of the Company in the financial services industry, our expansion of Internet and mobile banking tools and products based on customer needs and an increased level of employees working remotely. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. Disruptions or failures in the physical infrastructure or operating systems that support our businesses, customers or third parties, or cyber-attacks or security breaches of the networks, systems or devices that our customers or third parties use to access our products and services could result in customer attrition, financial losses, the inability of our customers or vendors to transact business with us, violations of applicable privacy and other laws, regulatory fines, penalties or intervention, reputational damage, reimbursement or other costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition. ***Our information technology systems and the systems of third parties upon which we rely may experience a failure, interruption or breach in security that could negatively affect our operations and reputation.*** We rely heavily on information technology systems to conduct our business, including the systems of third-party service providers. Any failure, interruption, or breach in security or operational integrity of these systems could result in failures or disruptions in our customer relationship management and general ledger, deposit, loan, and other systems. While we have policies and procedures designed to prevent or limit the impact of any failure, interruption, or breach in our security systems (including privacy and cyber-attacks), there can be no assurance that such events will not occur or if they do occur, that they will be adequately addressed. Information security and cyber-security risks have increased significantly in recent years because of new technologies, the use of the Internet and other electronic delivery channels (including mobile devices) to conduct financial transactions. Accordingly, we may be required to expend additional resources to continue to enhance our protective measures or to investigate and remediate any information security vulnerabilities or exposures. The occurrence of any system failures, interruptions, or breaches in security could expose us to reputation risk, litigation, regulatory scrutiny and possible financial liability that could have a material adverse effect on our financial condition and results of operations. ***Our failure to successfully keep pace with technological changes could have a material adverse impact on our business and, in turn, our financial condition and results of operations.*** The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve clients and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our clients. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations. ### We are subject to operational risk. We face the risk that the design of our controls and procedures, including those to mitigate the risk of fraud by employees or outsiders, may prove to be inadequate or are circumvented, thereby causing delays in the detection of errors or inaccuracies in data and information. Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, financial condition and results of operations. ***We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.*** Our performance is largely dependent on the talents and efforts of highly skilled individuals. There is intense competition in the financial services industry for qualified employees. In addition, we face increasing competition with businesses outside the financial services industry for the most highly skilled individuals. Our business operations could be adversely affected if we were unable to attract new employees and retain and motivate our existing employees. ### Risks Related to Our Wealth Management Business ***Revenues and profitability from our wealth management business may be adversely affected by any reduction in assets under management, which could reduce fees earned.*** The wealth management business derives the majority of its revenue from non-interest income, which consists of trust, investment advisory and other servicing fees. Substantial revenues are generated from investment management contracts with clients. Under these contracts, the investment advisory fees paid to us are typically based on the market value of assets under management. Assets under management may decline for various reasons including declines in the market value of the assets, which could be caused by price declines in the securities markets. Assets under management may also decrease due to redemptions and other withdrawals by clients or termination of contracts. This could be in response to adverse market conditions or in pursuit of other investment opportunities. If the assets under management we supervise decline and there is a related decrease in fees, it will negatively affect our results of operations. ### We may not be able to attract and retain wealth management clients. Due to strong competition, our wealth management business may not be able to attract and retain clients. Competition is strong because there are numerous well-established and successful investment management and wealth advisory firms including commercial banks and trust companies, investment advisory firms, mutual fund companies, stock brokerage firms, and other financial companies. Many of our competitors have greater resources than we have. Our ability to successfully attract and retain wealth management clients is dependent upon our ability to compete with competitors’ investment products, level of investment performance, client services and marketing and distribution capabilities. If we are not successful, our results of operations and financial condition may be negatively impacted. ***The wealth management industry is subject to extensive regulation, supervision and examination by regulators, and any enforcement action or adverse changes in the laws or regulations governing our business could decrease our revenues and profitability.*** The wealth management business is subject to regulation by a number of regulatory agencies that are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of customers participating in those markets. In the event of non-compliance with regulation, governmental regulators, including the SEC and the Financial Industry Regulatory Authority, may institute administrative or judicial proceedings that may result in censure, fines, civil penalties, the issuance of cease-and-desist orders or the deregistration or suspension of the non-compliant broker-dealer or investment adviser or other adverse consequences. The imposition of any such penalties or orders could have a material adverse effect on the wealth management segment's operating results and financial condition. We may be adversely affected as a result of new or revised legislation or regulations. Regulatory changes have imposed and may continue to impose additional costs, which could adversely impact our profitability. ## Properties As filed, 427 characters. The Company owns eight branches and leases eight branches. The Company leases an administrative and operations office building in Bedminster, New Jersey, private banking offices in Princeton and Teaneck, New Jersey and wealth offices in Greenville, Delaware, Morristown, New Providence, Red Bank and Summit, New Jersey and Bonita Springs, Florida. We consider our present facilities to be sufficient for our current operations. ## Legal proceedings As filed, 334 characters. In the normal course of business, lawsuits and claims may be brought against the Company and its subsidiaries. Currently, there are no pending or threatened litigation or proceedings against the Company or its subsidiaries, which assert claims that if adversely decided, we believe would have a material adverse effect on the Company. ## Management's discussion and analysis As filed, 121,487 characters. ***CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS***: This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about Management’s confidence and strategies and Management’s expectations about new and existing programs and products, investments, relationships, opportunities and market conditions. These statements may be identified by such forward-looking terminology as “expect,” “look,” “believe,” “anticipate,” “may,” or similar statements or variations of such terms. Actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to: - 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 impact of anticipated higher operating expenses in 2023 and beyond; - 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, including potential recessionary conditions; - declines in our net interest margin caused by the interest rate environment and/or our highly competitive market; - declines in the value in our investment portfolio; - impact from the pandemic event on our business, operations, customers, allowance for credit losses and capital levels; - the continuing impact of the COVID-19 pandemic on our business and results of operation; - 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; - inflation and changes in interest rates, 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; - 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; - monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System; - successful cyberattacks against our IT infrastructure and that of our IT and third-party providers; - adverse weather conditions; - the current or anticipated impact of military conflict, terrorism or other geopolitical events; - government shutdowns or a default by the U.S. on its debt obligations; - 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 governmental regulation, including, but not limited to, any increase in FDIC insurance premiums and changes in the monetary policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System; - changes in accounting policies and practices; and - other unexpected material adverse changes in our operations or earnings. Except as may be required by applicable law or regulation, the Company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes 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. ***OVERVIEW:*** The following discussion and analysis is intended to provide information about the financial condition and results of operations of the Company and its subsidiaries on a consolidated basis and should be read in conjunction with the consolidated financial statements and the related notes and supplemental financial information appearing elsewhere in this report. For the year ended December 31, 2022, the Company recorded net income of $74.2 million, and diluted earnings per share of $4.00 compared to $56.6 million and $2.93, respectively, for 2021, reflecting increases of $17.6 million, or 31 percent, and $1.07 per share, or 37 percent, respectively. During 2022, the Company continued to focus on executing its Strategic Plan – known as “Expanding Our Reach” – which focuses on the client experience and organic growth across all lines of business. The Strategic Plan calls for expansion of the Company’s wealth management business, organically and through acquisitions, and also expansion of the Company’s commercial and industrial (“C&I”) lending platform, through the use of private bankers, who lead with deposit gathering and wealth management discussions. The following are select highlights from 2022: - At December 31, 2022, the market value of assets under management and/or administration at Peapack Private was $9.9 billion. - Wealth Management fee income of $54.7 million for 2022, which comprised 23 percent of total revenue for the year. - The net interest margin improved to 2.91 percent for the twelve-month period ended December 31, 2022 compared to 2.38 percent for the twelve-month period ended December 31, 2021. - Total loans increased by $479 million, or 10%, to 5.3 billion at December 31, 2022 compared to $4.8 billion at December 31, 2021. - At December 31, 2022, total C&I loans (including equipment finance loans) comprised 42 percent of the total loan portfolio. - Noninterest-bearing demand deposits comprised 24 percent of total deposits as of December 31, 2022. - Core deposits (which includes noninterest-bearing demand and interest-bearing demand, savings and money market accounts) totaled 92 percent of total deposits at December 31, 2022. - Asset quality metrics continued to be strong at December 31, 2022. Nonperforming assets at December 31, 2022 were $19.1 million, or 0.30 percent of total assets. Total loans past due 30 through 89 days and still accruing were $7.6 million or 0.14 percent of total loans at December 31, 2022. - The Company and the Bank’s capital ratios at December 31, 2022 remain well above regulatory well capitalized standards. ***CRITICAL ACCOUNTING POLICIES AND ESTIMATES:*** Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Company’s consolidated financial statements 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 high 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 accounting 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 economic 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 judgement, 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’s quantitative component of allowance for credit losses for collectively evaluated loans is calculated with an economic forecast sourced from Moody’s. Management performed a hypothetical sensitivity analysis to understand the impact of changes in the economic forecast as a key input on our allowance for credit losses for collectively evaluated loans. Within the various economic scenarios considered for this hypothetical sensitivity analysis, as of December 31, 2022, the quantitative estimate of the allowance for credit loss for collectively evaluated loans would increase by approximately $12 million under sole consideration of an adverse Moody’s economic forecast, which stressed the national unemployment rate to 8 percent and negative growth for national GDP to approximately 2 percent. The hypothetical sensitivity calculation reflects the sensitivity of the modeled allowance estimate to macroeconomic forecast data but lacks other qualitative overlays and other qualitative adjustments that are part of the quarterly allowance process. As such, this does not necessarily reflect the nature and extent of future changes in the allowance for reasons including increases or decreases in qualitative adjustments, changes in the risk profile, size and composition of the loan portfolio, changes in the severity of the macroeconomic scenario and the range of scenarios under management consideration. 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". Securities classified as available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income/(loss), net of tax. Securities classified as held to maturity are carried at amortized cost. The Company's investment in a CRA investment fund is classified as an equity security. In accordance with ASU 2016-01, "Financial Instruments" unrealized holding gains and losses on equity securities are marked to market through the income statement. ***EARNINGS SUMMARY***: The following table presents certain key aspects of our performance for the years ended December 31, 2022, 2021 and 2020. *(Dollars in thousands, except share and per share data)* | Results of Operations: | At or for the Years Ended December 31, 2022 | 2021 | 2020 | Change 2022 vs 2021 | 2021 vs 2020 | | --- | ---: | ---: | ---: | ---: | ---: | | Interest income | **$211,875** | $160,067 | $165,750 | $51,808 | $(5,683) | | Interest expense | **35,795** | 22,006 | 38,148 | 13,789 | (16,142) | | Net interest income | **176,080** | 138,061 | 127,602 | 38,019 | 10,459 | | Provision for loan losses | **6,353** | 6,475 | 32,400 | (122) | (25,925) | | Net interest income after provision for loan losses | **169,727** | 131,586 | 95,202 | 38,141 | 36,384 | | Wealth management fee income | **54,651** | 52,987 | 40,861 | 1,664 | 12,126 | | Other income | **11,766** | 19,256 | 20,899 | (7,490) | (1,643) | | Total operating expense | **133,800** | 126,167 | 124,959 | 7,633 | 1,208 | | Income before income tax expense | **102,344** | 77,662 | 32,003 | 24,682 | 45,659 | | Income tax expense | **28,098** | 21,040 | 5,811 | 7,058 | 15,229 | | Net income | **$74,246** | $56,622 | $26,192 | $17,624 | $30,430 | | **Per Share Data:** | | | | | | | Basic earnings per common share | **$4.09** | $3.01 | $1.39 | $1.08 | $1.62 | | Diluted earnings per common share | **4.00** | 2.93 | 1.37 | 1.07 | 1.56 | | Cash dividends declared | **0.20** | 0.20 | 0.20 | — | — | | Book value end-of-period | **29.92** | 29.70 | 27.78 | 0.22 | 1.92 | | Average common shares outstanding | **18,161,605** | 18,788,679 | 18,896,825 | (627,074) | (108,146) | | Common stock equivalents (dilutive) | **406,493** | 503,923 | 184,362 | (97,430) | 319,561 | | Diluted average common shares outstanding | **18,568,098** | 19,292,602 | 19,081,187 | (724,504) | 211,415 | | Average equity to average assets | **8.56%** | 8.93% | 8.87% | (0.37)% | 0.06% | | Return on average assets | **1.20** | 0.94 | 0.45 | 0.26 | 0.49 | | Return on average equity | **14.02** | 10.56 | 5.11 | 3.46 | 5.45 | | Dividend payout ratio | **4.91** | 6.67 | 14.43 | (1.76) | (7.76) | | Net interest margin | **2.91** | 2.38 | 2.31 | 0.53 | 0.07 | | Noninterest expenses to average assets | **2.16** | 2.10 | 2.16 | 0.06 | (0.06) | | Noninterest income to average assets | **1.07** | 1.20 | 1.07 | (0.13) | 0.13 | | Balance sheet data (at period end): | | | | | | | Total assets | **$6,353,593** | $6,077,993 | $5,890,442 | $275,600 | $187,551 | | Securities held to maturity | **102,291** | 108,680 | — | (6,389) | 108,680 | | Securities available to sale | **554,648** | 796,753 | 622,689 | (242,105) | 174,064 | | CRA equity security, at fair value | **12,985** | 14,685 | 15,117 | (1,700) | (432) | | FHLB and FRB stock, at cost | **30,672** | 12,950 | 13,709 | 17,722 | (759) | | Total loans | **5,285,246** | 4,806,721 | 4,372,437 | 478,525 | 434,284 | | Allowance for loan losses | **60,829** | 61,697 | 67,309 | (868) | (5,612) | | Total deposits | **5,205,164** | 5,266,149 | 4,818,484 | (60,985) | 447,665 | | Total shareholders’ equity | **532,980** | 546,388 | 527,122 | (13,408) | 19,266 | | Cash dividends: | | | | | | | Common | **3,645** | 3,775 | 3,780 | (130) | (5) | | Assets under management and/or administration at Wealth Management Division (market value) | **$ 9.9 billion** | $ 11.1 billion | $ 8.8 billion | $ (1.2) billion | $ 2.3 billion | 30 *(Dollars in thousands, except share and per share data)* | Asset quality ratios (at period end): | At or for the Years Ended December 31, 2022 | 2021 | 2020 | Change 2022 vs 2021 | 2021 vs 2020 | | --- | ---: | ---: | ---: | ---: | ---: | | Nonperforming loans to total loans | **0.36%** | 0.32% | 0.26% | 0.04% | 0.06% | | Nonperforming assets to total assets | **0.30** | 0.26 | 0.19 | 0.04 | 0.07 | | Allowance for loan losses to nonperforming loans | **320.59** | 396.18 | 589.91 | (75.59) | (193.73) | | Allowance for loan losses to total loans | **1.15** | 1.28 | 1.54 | (0.13) | (0.26) | | Net charge-offs/(recoveries) to average loans plus other real estate owned | **0.02** | 0.27 | 0.19 | (0.25) | 0.08 | | **Liquidity and capital ratios:** | | | | | | | Average loans to average deposits | **94.97%** | 89.17% | 96.97% | 5.80% | (7.80)% | | Total shareholders’ equity to total assets | **8.39** | 8.99 | 8.95 | (0.60) | 0.04 | | **Selected Balance Sheet Ratios of the Company:** | | | | | | | Regulatory total capital to risk-weighted assets | **14.73%** | 14.64% | 17.67% | 0.09% | (3.03)% | | Regulatory leverage ratio | **8.90** | 8.29 | 8.53 | 0.61 | (0.24) | | Noninterest bearing deposits to total deposits | **23.94** | 18.16 | 17.30 | 5.78 | 0.86 | | Time deposits to total deposits | **7.11** | 9.02 | 12.37 | (1.91) | (3.35) | #### 2022 compared to 2021 The Company recorded net income of $74.25 million and diluted earnings per share of $4.00 for the year ended December 31, 2022, compared to net income of $56.62 million and diluted earnings per share of $2.93 for the year ended December 31, 2021. These results produced a return on average assets of 1.20 percent and 0.94 percent for 2022 and 2021, respectively, and a return on average shareholders’ equity of 14.02 percent and 10.56 percent for 2022 and 2021, respectively. The increase in net income for 2022 was principally driven by the Company’s increased net interest income resulting from loan growth, continued margin expansion, wealth management fee income and increased SBA income. The earnings for 2022 included a $6.6 million loss on the sale of securities as a result of the Company's balance sheet repositioning. Margin expansion was driven by target Federal Funds being increased 400 basis points through 2022, which benefitted the yield on the Company's floating rate loan portfolio; while the Company managed the cost of interest-bearing liabilities so that it increased by a slower rate and a lower amount. Operating expenses increased by $7.6 million due to a full year of expenses associated with the July 2021 acquisition of Princeton Portfolio Strategies Group ("PPSG"), increased corporate and health insurance costs, hiring in line with the Company's strategic plan and normal merit increases. In addition, the Company recorded $201,000 of expense associated with consolidation of private banking offices, and $200,000 of expense related to accelerated restricted stock vesting related to one employee. 2021 expenses included $648,000 of accelerated expense related to the redemption of subordinated debt. The Company recorded swap valuation expense of $673,000 and $2.2 million in 2022 and 2021, respectively. Both 2022 and 2021 included $1.5 million of severance expense related to certain staff reorganizations within several areas of the Bank. ### NET INTEREST INCOME AND NET INTEREST MARGIN The primary source of the Company’s operating income is net interest income, which is the difference between interest and dividends earned on interest-earning assets and fees earned on loans, and interest paid on interest-bearing liabilities. Interest-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 interest-earning assets and the average cost of interest-bearing liabilities (“net interest spread”) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest margin ("NIM") is calculated as net interest income as a percent of total interest-earning assets. The Company’s net interest income, spread and margin are affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows and general levels of nonperforming assets. The following table compares the average balance sheets, interest rate spreads and net interest margins for the years ended December 31, 2022, 2021 and 2020 (on a fully tax-equivalent basis "FTE"): *Year Ended December 31, 2022* *(Dollars in thousands)* | Assets: Interest-earnings assets: Investments: | Average Balance | Income/Expense (FTE) | Yield (FTE) | | --- | ---: | ---: | ---: | | Taxable (1) | **$803,982** | **$13,854** | **1.72%** | | Tax-exempt (1)(2) | **3,521** | **137** | **3.89** | | Loans (2)(3): | | | | | Mortgages | **513,189** | **15,165** | **2.96** | | Commercial mortgages | **2,478,891** | **87,488** | **3.53** | | Commercial | **2,046,735** | **90,225** | **4.41** | | Commercial construction | **12,600** | **533** | **4.23** | | Installment | **36,685** | **1,447** | **3.94** | | Home Equity | **37,755** | **1,656** | **4.39** | | Other | **274** | **26** | **9.49** | | Total loans | **5,126,129** | **196,540** | **3.83** | | Federal funds sold | **—** | **—** | **0.13** | | Interest-earning deposits | **171,491** | **2,763** | **1.61** | | Total interest-earning assets | **6,105,123** | **213,294** | **3.49%** | | Noninterest-earning assets: | | | | | Cash and due from banks | **8,046** | | | | Allowance for loan losses | **(60,037)** | | | | Premises and equipment | **23,312** | | | | Other assets | **111,893** | | | | Total noninterest-earning assets | **83,214** | | | | **Total assets** | **$6,188,337** | | | | **Liabilities and shareholders’ equity:** | | | | | Interest-bearing deposits: | | | | | Checking | **$2,363,412** | **$17,861** | **0.76%** | | Money markets | **1,253,032** | **6,113** | **0.49** | | Savings | **162,396** | **26** | **0.02** | | Certificates of deposit - retail and listing service | **397,128** | **2,971** | **0.75** | | Subtotal interest-bearing deposits | **4,175,968** | **26,971** | **0.65** | | Interest-bearing demand - brokered | **84,178** | **1,579** | **1.88** | | Certificates of deposit - brokered | **29,778** | **942** | **3.16** | | Total interest-bearing deposits | **4,289,924** | **29,492** | **0.69** | | Borrowed funds | **26,631** | **600** | **2.25** | | Finance lease liability | **5,241** | **250** | **4.77** | | Subordinated debt | **132,839** | **5,453** | **4.10** | | Total interest-bearing liabilities | **4,454,635** | **35,795** | **0.80%** | | Noninterest-bearing liabilities: | | | | | Demand deposits | **1,107,943** | | | | Accrued expenses and other liabilities | **96,331** | | | | Total noninterest-bearing liabilities | **1,204,274** | | | | Shareholders’ equity | **529,428** | | | | **Total liabilities and shareholders’ equity** | **$6,188,337** | | | | **Net interest income** | | **$177,499** | | | Net interest spread | | | **2.69%** | | Net interest margin (4) | | | **2.91%** | 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 income tax rate. 3\. Loans are stated net of unearned income and include nonaccrual loans. 4\. Net interest income on an FTE basis as a percentage of total average interest-earning assets. *Year Ended December 31, 2021* *(Dollars in thousands)* | Assets: Interest-earnings assets: Investments: | Average Balance | Income/Expense (FTE) | Yield (FTE) | | --- | ---: | ---: | ---: | | Taxable (1) | $838,174 | $11,577 | 1.38% | | Tax-exempt (1)(2) | 6,579 | 296 | 4.50 | | Loans (2)(3): | | | | | Mortgages | 503,616 | 15,359 | 3.05 | | Commercial mortgages | 2,032,318 | 63,298 | 3.11 | | Commercial | 1,881,683 | 66,652 | 3.54 | | Commercial construction | 20,420 | 692 | 3.39 | | Installment | 34,390 | 1,030 | 3.00 | | Home Equity | 44,735 | 1,479 | 3.31 | | Other | 247 | 21 | 8.50 | | Total loans | 4,517,409 | 148,531 | 3.29 | | Federal funds sold | 48 | — | 0.13 | | Interest-earning deposits | 477,477 | 545 | 0.11 | | Total interest-earning assets | 5,839,687 | 160,949 | 2.76% | | Noninterest-earning assets: | | | | | Cash and due from banks | 10,396 | | | | Allowance for loan losses | (67,075) | | | | Premises and equipment | 23,094 | | | | Other assets | 197,893 | | | | Total noninterest-earning assets | 164,308 | | | | **Total assets** | $6,003,995 | | | | **Liabilities and shareholders’ equity:** | | | | | Interest-bearing deposits: | | | | | Checking | $2,078,658 | $4,426 | 0.21% | | Money markets | 1,260,865 | 2,882 | 0.23 | | Savings | 146,210 | 75 | 0.05 | | Certificates of deposit - retail and listing service | 483,889 | 4,058 | 0.84 | | Subtotal interest-bearing deposits | 3,969,622 | 11,441 | 0.29 | | Interest-bearing demand - brokered | 96,301 | 1,721 | 1.79 | | Certificates of deposit - brokered | 33,790 | 1,058 | 3.13 | | Total interest-bearing deposits | 4,099,713 | 14,220 | 0.35 | | Borrowed funds | 110,077 | 473 | 0.43 | | Finance lease liability | 6,260 | 300 | 4.79 | | Subordinated debt | 156,888 | 7,013 | 4.47 | | Total interest-bearing liabilities | 4,372,938 | 22,006 | 0.50% | | Noninterest-bearing liabilities: | | | | | Demand deposits | 959,912 | | | | Accrued expenses and other liabilities | 134,948 | | | | Total noninterest-bearing liabilities | 1,094,860 | | | | Shareholders’ equity | 536,197 | | | | **Total liabilities and shareholders’ equity** | $6,003,995 | | | | **Net interest income** | | $138,943 | | | Net interest spread | | | 2.26% | | Net interest margin (4) | | | 2.38% | 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 income tax rate. 3\. Loans are stated net of unearned income and include nonaccrual loans. 4\. Net interest income on an FTE basis as a percentage of total average interest-earning assets. *Year Ended December 31, 2020* *(Dollars in thousands)* | Assets: Interest-earnings assets: Investments: | Average Balance | Income/Expense (FTE) | Yield (FTE) | | --- | ---: | ---: | ---: | | Taxable (1) | $510,245 | $8,782 | 1.72% | | Tax-exempt (1)(2) | 9,479 | 477 | 5.03 | | Loans (2)(3): | | | | | Mortgages | 528,687 | 17,882 | 3.38 | | Commercial mortgages | 1,958,262 | 64,541 | 3.30 | | Commercial | 1,969,115 | 71,037 | 3.61 | | Commercial construction | 5,932 | 295 | 4.97 | | Installment | 51,007 | 1,532 | 3.00 | | Home Equity | 53,853 | 1,940 | 3.60 | | Other | 311 | 29 | 9.32 | | Total loans | 4,567,167 | 157,256 | 3.44 | | Federal funds sold | 102 | — | 0.25 | | Interest-earning deposits | 504,753 | 968 | 0.19 | | Total interest-earning assets | 5,591,746 | $167,483 | 3.00% | | Noninterest-earning assets: | | | | | Cash and due from banks | 7,025 | | | | Allowance for loan losses | (61,401) | | | | Premises and equipment | 21,455 | | | | Other assets | 219,287 | | | | Total noninterest-earning assets | 186,366 | | | | **Total assets** | $5,778,112 | | | | **Liabilities and shareholders’ equity:** | | | | | Interest-bearing deposits: | | | | | Checking | $1,742,846 | $7,279 | 0.42% | | Money markets | 1,227,295 | 6,185 | 0.50 | | Savings | 120,780 | 63 | 0.05 | | Certificates of deposit - retail and listing service | 654,652 | 11,476 | 1.75 | | Subtotal interest-bearing deposits | 3,745,573 | 25,003 | 0.67 | | Interest-bearing demand – brokered | 143,388 | 2,773 | 1.93 | | Certificates of deposit – brokered | 33,735 | 1,061 | 3.15 | | Total interest-bearing deposits | 3,922,696 | 28,837 | 0.74 | | Borrowed funds | 308,814 | 3,976 | 1.29 | | Finance lease liability | 7,157 | 343 | 4.79 | | Subordinated debt | 86,246 | 4,992 | 5.79 | | Total interest-bearing liabilities | 4,324,913 | 38,148 | 0.88% | | Noninterest-bearing liabilities: | | | | | Demand deposits | 787,191 | | | | Accrued expenses and other liabilities | 153,648 | | | | Total noninterest-bearing liabilities | 940,839 | | | | Shareholders’ equity | 512,360 | | | | **Total liabilities and shareholders’ equity** | $5,778,112 | | | | **Net interest income** | | $129,335 | | | Net interest spread | | | 2.12% | | Net interest margin (4) | | | 2.31% | 1\. Average balances for available for sale securities are based on amortized cost. 2\. Interest income is presented on a tax-equivalent basis using a 21 percent federal income tax rate. 3\. Loans are stated net of unearned income and include nonaccrual loans. 4\. Net interest income on an FTE basis as a percentage of total average interest-earning assets. For the years indicated in the table below, there were no "out-of-period items and adjustments." The effect of volume and rate changes on net interest income (on an FTE basis) for the periods indicated are shown below: | (In Thousands): ASSETS: | Year Ended 2022 Compared with 2021 Difference due to Change In: Volume | Rate | Net Change In Income/ Expense | Year Ended 2021 Compared with 2020 Change In Income/ Volume | Rate | Net Change In Income/ Expense | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Investments | **$(430)** | **$2,548** | **$2,118** | $4,296 | $(1,682) | $2,614 | | Loans | **21,095** | **26,914** | **48,009** | (1,588) | (7,137) | (8,725) | | Federal funds sold | **—** | **—** | **—** | — | — | — | | Interest-earning deposits | **(544)** | **2,762** | **2,218** | (48) | (375) | (423) | | Total interest income | **$20,121** | **$32,224** | **$52,345** | $2,660 | $(9,194) | $(6,534) | | **LIABILITIES:** | | | | | | | | Checking | **$903** | **$12,532** | **$13,435** | $703 | $(3,556) | $(2,853) | | Money market | **232** | **2,999** | **3,231** | 173 | (3,476) | (3,303) | | Savings | **(5)** | **(44)** | **(49)** | 12 | — | 12 | | Certificates of deposit - retail | **(681)** | **(406)** | **(1,087)** | (2,478) | (4,940) | (7,418) | | Certificates of deposit - brokered | **(126)** | **10** | **(116)** | 2 | (5) | (3) | | Interest bearing demand brokered | **(226)** | **84** | **(142)** | (862) | (190) | (1,052) | | Borrowed funds | **(1,841)** | **1,968** | **127** | (2,504) | (999) | (3,503) | | Finance lease liability | **(48)** | **(2)** | **(50)** | (42) | (1) | (43) | | Subordinated debt | **(995)** | **(565)** | **(1,560)** | 3,159 | (1,138) | 2,021 | | Total interest expense | **$(2,787)** | **$16,576** | **$13,789** | $(1,837) | $(14,305) | $(16,142) | | Net interest income | **$22,908** | **$15,648** | **$38,556** | $4,497 | $5,111 | $9,608 | #### 2022 compared to 2021 Net interest income, on a fully tax-equivalent basis, grew $38.6 million, or 28 percent, in 2022 to $177.5 million from $138.9 million in 2021. The net interest margin was 2.91 percent and 2.38 percent for the years ended December 31, 2022 and 2021, respectively, an increase of 53 basis points year over year. The growth in net interest income and NIM for the year ended December 31, 2022, when compared to 2021 was due to an increase in the yield on the average balance of interest-earning assets due to the current interest rate environment and an increase in average interest-earning assets of $265.4 million, or 5 percent, to $6.11 billion, offset by an increase in the average balance of interest-bearing liabilities of $81.7 million and an increase in the cost of interest-bearing liabilities of 30 basis points. 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 increase in average interest-earning assets was driven by growth of $608.7 million in loans to $5.13 billion in 2022 from $4.52 billion in 2021 as the Company deployed excess liquidity as shown by a decrease of $306.0 million in interest-earning deposits to $171.5 million when comparing the year ended 2022 to 2021. The growth in loans was driven by growth in commercial mortgages of $446.6 million to $2.48 billion in 2022 when compared to $2.03 billion in 2021 as part of the Company’s balance sheet repositioning executed during the first quarter of 2022 and the use of excess liquidity from the fourth quarter of 2022. Additionally, the average balance of commercial loans grew $165.1 million, or 9 percent, to $2.05 billion in 2022 when compared to $1.88 billion for 2021. The average balance of investments was $807.5 million in 2022 compared to $844.8 million for 2021 which reflected a decrease of $37.3 million or 4 percent. During the first quarter of 2022, the Company executed a balance sheet reposition, which included the sale of $125.0 million of investments at lower yields to partially fund like duration, higher-yielding multifamily loans. Normal amortization of the portfolio coupled with the sale resulted in the slight decline in the portfolio. For the 2022 and 2021 periods, the average yields earned on interest-earning assets were 3.49 percent and 2.76 percent, respectively, an increase of 73 basis points. The increase in yields on interest-earning assets was primarily due to the increase in target Federal Funds rate of 400 basis points. This resulted in an increase of yield on loans of 54 basis points to 3.83 percent for 2022. The yield on interest-earning deposits increased 150 basis points to 1.61 percent for 2022. Further, the balance of interest-earning deposits decreased significantly 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 2022. The average yield on total loans increased 54 basis points to 3.83 percent for 2022 compared to 3.29 percent for 2021. This increase was driven by an increase in yield on commercial loans of 87 basis points to 4.41 percent for 2022, due to an increase in target Federal Funds rate of 400 basis points during 2022 given these loans are typically floating rates with short repricing periods. The yield on commercial mortgages was 3.53 percent for 2022 compared to 3.11 percent for 2021 reflecting an increase of 42 basis points. This increase was due to the originations of loans with higher yields during 2022. In addition, 23 percent of our loans reprice within one month; 35 percent within three months and 45 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 excess liquidity as seen by the decline in interest-earning deposits of $306.0 million when comparing the 2022 and 2021 period. During 2022 and 2021, the Company recorded yield on investments of 1.73 percent and 1.41 percent, respectively. The increase in yield was due to the Company strategically purchasing higher yielding investments during 2022 in anticipation of maturities and to utilize excess liquidity. The average balance of interest-bearing liabilities totaled $4.45 billion for 2022 representing an increase of $81.7 million or 2 percent from $4.37 billion in 2021. The increase in interest-bearing liabilities reflected growth of interest-bearing deposits of $190.2 million to $4.29 billion in 2022 from $4.10 billion in 2021; offset by decreases in the average balance of borrowings of $83.4 million from $110.1 million in 2021 to $26.6 million in 2022 and $24.0 million in the average balance of subordinated debt to $132.8 million in 2022. The increase in the average balance of interest-bearing deposits was due to growth in customer deposits (excluding brokered CDs and brokered interest-bearing demand deposits but including reciprocal funds discussed below) of $206.3 million to $4.18 billion for 2022 from $3.97 billion in 2021. The increase was due to an increase in retail deposits from our branch network; an increase in interest-bearing check 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 $16.1 million in the average balance of brokered deposits and $86.8 million in the average balance of retail CDs. 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 of more participating banks to ensure that each deposit customer is eligible for the full amount of FDIC insurance. As a participant, the Company receives reciprocal amounts of deposits from other participating banks. Such reciprocal deposit balances were $662.0 million and $732.0 million for 2022 and 2021, respectively. The decrease in borrowings of $83.4 million to $26.6 million for 2022 was principally due to the Company's participation in the Paycheck Protection Program Loan Facility in 2021 to fund PPP loans 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 2030 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. The cost of interest-bearing liabilities was 80 basis points and 50 basis points for 2022 and 2021, respectively, reflecting an increase of 30 basis points. The increase was driven by an increase in the average cost of interest-bearing deposits of 34 basis points to 69 basis points for 2022. Although the Federal Reserve raised target Federal Funds rate 400 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 182 basis points to 2.25 percent. The average cost of interest-bearing liabilities was also affected by a decline in the cost of subordinated debt of 37 basis points to 4.10 percent for 2022. ***INVESTMENT SECURITIES:*** 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. 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. Equity securities are carried at fair value with unrealized gains and losses recorded in non-interest income as incurred. At December 31, 2022, the Company had investment securities held to maturity with a carrying cost of $102.3 million and an estimated fair value of $87.2 million compared with a carrying cost of $108.7 million and an estimated fair value of $108.5 million at December 31, 2021. At December 31, 2022, the Company had investment securities available for sale with an estimated fair value of $554.6 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 the 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 2022. A net unrealized loss (net of income tax) of $81.0 million and a net unrealized gain (net of income tax) of $9.9 million were included in shareholders’ equity at December 31, 2022 and 2021, respectively. The Company had one equity security (a CRA investment security) with a fair value of $13.0 million and $14.7 million at December 31, 2022 and 2021, respectively. The Company recorded a $1.7 million unrealized loss in securities gains/losses, net, on the Consolidated Statements of Income for the year ended December 31, 2022, as compared to a $432,000 unrealized loss for the year ended December 31, 2021 related to the change in the market value of the equity security. The amortized cost and fair value of investment securities held to maturity and available for sale at December 31, 2022, 2021 and 2020 are shown below: *(In thousands)* | Investment securities - held to maturity: | 2022 Amortized Cost | Estimated Fair Value | 2021 Amortized Cost | Estimated Fair Value | 2020 Amortized Cost | Estimated Fair Value | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | U.S. government-sponsored agencies | **$40,000** | **$35,437** | $40,000 | $39,982 | $— | $— | | Mortgage-backed securities-residential (principally U.S. government-sponsored entities) | **62,291** | **51,750** | 68,680 | 68,478 | — | — | | Total investment securities - held to maturity | **$102,291** | **$87,187** | $108,680 | $108,460 | $— | $— | | Investment securities - available for sale: | | | | | | | | U.S. treasuries | **$—** | **$—** | $— | $— | $2,613 | $2,613 | | U.S. government-sponsored agencies | **244,774** | **190,542** | 280,045 | 272,221 | 84,424 | 83,771 | | Mortgage-backed securities-residential (principally U.S. government-sponsored entities) | **372,471** | **325,738** | 481,062 | 476,974 | 467,915 | 476,058 | | SBA pool securities | **31,934** | **27,427** | 40,649 | 39,561 | 49,457 | 49,129 | | State and political subdivision | **1,866** | **1,849** | 5,431 | 5,476 | 7,987 | 8,089 | | Corporate bond | **10,000** | **9,092** | 2,500 | 2,521 | 3,000 | 3,029 | | Total investment securities - available for sale | **$661,045** | **$554,648** | $809,687 | $796,753 | $615,396 | $622,689 | | Total investment securities | **$763,336** | **$641,835** | $918,367 | $905,213 | $615,396 | $622,689 | 39 The following table presents the contractual maturities and yields of debt securities held to maturity and available for sale as of December 31, 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 - held to maturity: | | | | | | | U.S. government-sponsored agencies | $— | $30,000 | $10,000 | $— | $40,000 | | | —% | 1.47% | 1.74% | —% | 1.54% | | Mortgage-backed securities- | $— | $— | $— | $62,291 | $62,291 | | residential (1) | —% | —% | —% | 1.76% | 1.76% | | Total investment securities - held to maturity | $— | $30,000 | $10,000 | $62,291 | $102,291 | | | —% | 1.47% | 1.74% | 1.76% | 1.67% | | Investment securities - available for sale: | | | | | | | U.S. government-sponsored agencies | $— | $— | $113,321 | $77,221 | $190,542 | | | —% | —% | 1.38% | 1.79% | 1.56% | | Mortgage-backed securities- | $50,150 | $8,695 | $15,164 | $251,729 | $325,738 | | residential (1) | 4.98% | 2.86% | 1.92% | 2.43% | 2.76% | | SBA pool securities | $— | $— | $11,086 | $16,341 | $27,427 | | | —% | —% | 1.81% | 1.34% | 1.52% | | State and political subdivisions (2) | $1,849 | $— | $— | $— | $1,849 | | | 2.23% | —% | —% | —% | 2.23% | | Corporate bond | $— | $— | $9,092 | $— | $9,092 | | | —% | —% | 4.81% | —% | 4.81% | | Total investment securities - available for sale | $51,999 | $8,695 | $148,663 | $345,291 | $554,648 | | | 4.88% | 2.86% | 1.66% | 2.22% | 2.28% | | Total investment securities | $51,999 | $38,695 | $158,663 | $407,582 | $656,939 | | | 4.88% | 1.78% | 1.68% | 2.16% | 2.22% | (1) Shown using stated final maturity (2) Yields presented on a fully tax-equivalent basis, using a 21 percent federal income tax. 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 2022 was $171.5 million compared to $477.5 million in 2021. ***LOANS:*** The loan portfolio represents the largest portion of the Company’s interest-earning assets and is the primary source of interest and fee income. Loans are primarily originated in New Jersey and the boroughs of New York City and, to a lesser extent, Pennsylvania and Delaware. The Company also offers equipment financing loan and leases that are originated nationally. As of December 31, 2022, 42 percent of the total loan portfolio was concentrated in C&I loans (including equipment financing), 35 percent in multifamily loans and 12 percent in commercial mortgages. Total loans were $5.29 billion and $4.81 billion at December 31, 2022 and 2021, respectively, an increase of $478.5 million, over the previous year. Multifamily mortgage loans were $1.86 billion at December 31, 2022, an increase of $268.0 million or 17 percent when compared to $1.60 billion at December 31, 2021 due to increased originations and the balance sheet repositioning executed in the first quarter of 2022. During 2022, commercial mortgages decreased $38.0 million due to increased paydowns compared to 2021. Commercial loans, which includes equipment financing, totaled $2.19 billion at December 31, 2022. This was an increase of $238.9 million, or 12 percent, when compared to December 31, 2021. The increase in commercial loans was due to higher levels of equipment financing originations, which resulted in origination growth of $210.2 million to $965.6 million for 2022. The Company originates loans that are partially guaranteed by the SBA, for the purposes of providing working capital and/or, financing the purchase of equipment, inventory or commercial real estate and that could be used for start-up and smaller 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 held in the loan portfolio. During 2022, the Bank sold $56.0 million of the guaranteed portion of SBA loans into the secondary market. As of December 31, 2022, the balance of the non-guaranteed portion of SBA loans held on our balance sheet totaled $40.6 million and is included in commercial loans. The following table presents the contractual repayments of the loan portfolio, by loan type, at December 31, 2022: *(In thousands)* | | Within One Year | After 1 But Within 5 Years | After 5 But Within 15 Years | After 15 Years | Total | | --- | ---: | ---: | ---: | ---: | ---: | | Residential mortgage | $5,859 | $11,800 | $423,873 | $84,224 | $525,756 | | Commercial mortgage (including multifamily) | 96,016 | 565,380 | 68,579 | 1,758,565 | 2,488,540 | | Commercial loans (including equipment financing) | 380,626 | 1,151,552 | 76,306 | 585,610 | 2,194,094 | | Commercial construction | 4,042 | — | — | — | 4,042 | | Home equity lines of credit | 953 | — | 33,314 | 229 | 34,496 | | Consumer and other loans | 1,045 | 3,115 | 29,571 | 4,587 | 38,318 | | Total loans | $488,541 | $1,731,847 | $631,643 | $2,433,215 | $5,285,246 | The following table presents the loans, by loan type, that have a fixed interest rate and an adjustable interest rate due after one year: *(In thousands)* | | Fixed Interest Rate | Adjustable Interest Rate | | --- | ---: | ---: | | Residential mortgage | $239,479 | $280,418 | | Commercial mortgage (including multifamily) | 221,552 | 2,170,972 | | Commercial loans | 882,942 | 930,526 | | Consumer loans | 5,832 | 31,441 | | Home equity loans | — | 33,543 | | Total loans | $1,349,805 | $3,446,900 | The Company has not made nor invested in subprime loans or “Alt-A” type mortgages. The geographic breakdown of the multifamily portfolio, net of participated multifamily loans, at December 31, 2022 is as follows: *(Dollars in thousands)* | | | | | --- | ---: | ---: | | New York | $1,015,576 | 55% | | New Jersey | 585,598 | 31 | | Pennsylvania | 228,444 | 12 | | Delaware | 34,297 | 2 | | Total Multifamily | $1,863,915 | 100% | 41 A further breakdown of the multifamily portfolio by county within each respective State is as follows: | New Jersey | | New York | | Pennsylvania | | Delaware | | | --- | ---: | --- | ---: | --- | ---: | --- | ---: | | Essex County | 29% | Bronx County | 48% | Philadelphia County | 61% | New Castle County | 84% | | Hudson County | 23 | Kings County | 25 | Lehigh County | 12 | York County | 16% | | Union County | 19 | New York County | 18 | York County | 10 | | | | Morris County | 8 | Westchester County | 5 | Lycoming County | 4 | | | | Bergen County | 6 | All other NY counties | 4 | Bucks County | 3 | | | | Monmouth County | 3 | | | Warren County | 3 | | | | Passaic County | 3 | | | All other PA counties | 7 | | | | All other NJ counties | 9 | | | | | | | | Total | 100% | Total | 100% | Total | 100% | Total | 100% | Principal types of owner occupied commercial real estate properties (by Call Report code), included in commercial mortgage loans on the balance sheet, at December 31, 2022 are: *(Dollars in thousands)* | | | | | --- | ---: | ---: | | Office Buildings/Office Condominiums | $79,134 | 29% | | Industrial (including Warehouse) | 61,895 | 23 | | Medical Offices | 44,179 | 16 | | Retail Buildings/Shopping Centers | 25,884 | 10 | | Other Owner Occupied CRE Properties | 60,917 | 22 | | Total Owner Occupied CRE Loans | $272,009 | 100% | Principal types of non-owner occupied commercial real estate properties (by Call Report code), at December 31, 2022 are as follows. These loans are included in commercial mortgage loans and commercial loans on the Company’s balance sheet. *(Dollars in thousands)* | | | | | --- | ---: | ---: | | Healthcare | $322,232 | 31% | | Retail Buildings/Shopping Centers | 229,588 | 22 | | Office Buildings/Office Condominiums | 101,975 | 10 | | Hotels and Hospitality | 93,248 | 9 | | Industrial (including Warehouse) | 60,371 | 6 | | Medical Offices | 40,818 | 4 | | Mixed Use (Commercial/Residential) | 57,270 | 5 | | Mixed Use (Retail/Office) | 28,883 | 3 | | Other Non-Owner Occupied CRE Properties | 109,740 | 10 | | Total Non-Owner Occupied CRE Loans | $1,044,125 | 100% | At December 31, 2022 and 2021, the Bank had a concentration in commercial real estate loans as defined by applicable regulatory guidance. The following table presents such concentration levels at December 31, 2022 and 2021: | | As of December 31, 2022 | 2021 | | --- | ---: | ---: | | Multifamily mortgage loans as a percent of total regulatory capital of the Bank | **251%** | 237% | | Non-owner occupied commercial real estate loans as a percent of total regulatory capital of the Bank | **141** | 149 | | Total CRE concentration | **392%** | 386% | 42 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. ***GOODWILL:*** At December 31, 2022 and 2021, goodwill remained $36.2 million. The Bank intends to continue to grow its wealth management business through growth in existing relationships, attraction of new clients and acquisitions, which could result in additional goodwill. ***DEPOSITS:*** At December 31, 2022 and 2021, the Company reported total deposits of $5.21 billion and $5.27 billion, a decrease of $61.0 million, or 1 percent, year over year. The Company’s strategy is to fund a majority of its loan growth with core deposits, which is an important factor in the generation of net interest income. The Company had large deposit outflows of $142 million in the second half of 2022, which included several large relationships strategically utilizing their funds, including transferring funds to our Wealth Management business, acquisitions, further investing in their business, and purchasing real estate and other investments. The Company’s average deposits for 2022 increased $338.2 million, or 7 percent, over 2021 average levels to $5.40 billion. The Company saw the largest average balance growth in noninterest-bearing demand and interest-bearing checking balances. During the third quarter of 2022, the Company successfully migrated $287 million of interest-bearing checking into noninterest-bearing demand deposits, partially offset by clients utilizing funds for business operations. The average balance growth in customer deposits (excluding brokered CDs and brokered interest-bearing demand deposits, but including reciprocal funds discussed below) was driven by several factors including an increase in retail deposits from our branch network; a focus on providing high-touch client service; new deposit relationships related to our participation in the PPP; and a full array of treasury management products that support core deposit growth. The Company has also successfully focused on: - Growth in deposits associated with its private banking relationships, including lending activities; and - Business and personal core deposit generation, particularly noninterest-bearing demand and checking. The Company continues to maintain brokered interest-bearing demand deposits matched to interest rate swaps, thereby extending their duration. Such deposits are generally a more cost-effective alternative to wholesale borrowings and do not require pledging of collateral, as the borrowings do. These deposits decreased $25.0 million to $60.0 million at December 31, 2022 from $85.0 million at the same period in 2021. The Company ensures ample available collateralized liquidity as a backup to these short-term brokered deposits. At December 31, 2022, the Company had transacted pay fixed, receive floating interest rate swaps totaling $390.0 million in notional amount, which included $100.0 million of forward-starting swaps for interest rate risk management purposes. The following table sets forth information concerning the composition of the Company’s average balance of deposits and average interest rates paid for the following years: *(Dollars in thousands)* | | 2022 | | 2021 | | 2020 | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Noninterest-bearing demand | **$1,107,943** | —% | $959,912 | —% | $787,191 | —% | | Checking | **2,363,412** | **0.76** | 2,078,658 | 0.21 | 1,742,846 | 0.42 | | Savings | **162,396** | **0.02** | 146,210 | 0.05 | 120,780 | 0.05 | | Money markets | **1,253,032** | **0.49** | 1,260,865 | 0.23 | 1,227,295 | 0.50 | | Certificates of deposit - retail and listing service | **397,128** | **0.75** | 483,889 | 0.84 | 654,652 | 1.75 | | Interest-bearing | | | | | | | | Demand - brokered | **84,178** | **1.88** | 96,301 | 1.79 | 143,388 | 1.93 | | Certificates of deposit - brokered | **29,778** | **3.16** | 33,790 | 3.13 | 33,735 | 3.15 | | Total deposits | **$5,397,867** | **0.55%** | $5,059,625 | 0.28% | $4,709,887 | 0.61% | Reciprocal deposits of $620.1 million, $647.8 million and $652.5 million are included in the Company’s interest-bearing checking deposits as of December 31, 2022, 2021, and 2020, respectively. At December 31, 2022, the Company does carry deposits that exceed the FDIC insurance limit of $250,000. At December 31, 2022, we had no deposits that were uninsured for any reason other than being in excess of the maximum amount for federal deposit insurance. The following table shows the maturity for certificates of deposit of $250,000 or more as of December 31, 2022 (in thousands): | | | | --- | ---: | | Three months or less | $6,715 | | Over three months through six months | 7,661 | | Over six months through twelve months | 43,673 | | Over twelve months | 33,081 | | Total | $91,130 | ***FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS:*** As part of our overall funding and liquidity management program, from time to time we borrow from the Federal Home Loan Bank (the "FHLB"). *(Dollars in thousands)* | | As of December 31, 2022 | 2021 | 2020 | | --- | ---: | ---: | ---: | | Amount outstanding at end of the year | **$379,530** | $— | $192,086 | | Weighted average interest rate end of the year | **4.61%** | —% | 0.35% | | Average daily balance during the year | **$26,631** | $110,077 | $308,814 | | Weighted average interest rate during the year | **2.25%** | 0.43% | 1.29% | | Maximum month-end balance during the year | **$379,530** | $186,115 | $655,837 | At December 31, 2022 the Company had $379.5 million of overnight borrowings at the FHLB at a rate of 4.61 percent compared to no overnight borrowings at December 31, 2021 or 2020. The Company prepaid $105.0 million of FHLB advances, which had a weighted-average interest rate of 3.20 percent resulting in a prepayment penalty of $4.8 million, during 2020. The repayment of the FHLB advances was expected to provide a benefit to interest expense greater than the prepayment penalty over the remaining life of the advances. The Company had borrowings from the PPPLF of $177.1 million at December 31, 2020. The borrowings had a rate of 0.35 percent, primarily all of which had a two-year maturity. The Company utilized the PPPLF to fund PPP loan production. At December 31, 2022, unused short-term or overnight borrowing commitments totaled $1.5 billion from the FHLB, $22.0 million from correspondent banks and $1.8 billion from the Federal Reserve Bank. ***SUBORDINATED DEBT:*** In December 2017, the Company issued $35.0 million in aggregate principal amount of fixed-to-floating subordinated notes (the “2017 Notes”) to certain institutional investors. The 2017 Notes are non-callable for five years, have a stated maturity of December 15, 2027, and had a fixed interest rate of 4.75 percent per year until December 15, 2022. From December 16, 2022, to the maturity date or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 254 basis points, payable quarterly in arrears. Debt issuance costs incurred totaled $875,000 and are being amortized to maturity. In December 2020, the Company issued $100.0 million in aggregate principal amount of fixed to floating subordinated notes (the “2020 Notes”) to certain institutional investors. The 2020 Notes are non-callable for five years, have a stated maturity of December 22, 2030, and bear interest at a fixed rate of 3.50 percent per year until December 22, 2025. From December 23, 2025 to the maturity date or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month SOFR plus 326 basis points, payable quarterly in arrears. Debt issuance costs incurred totaled $1.9 million and are being amortized to maturity. The Company used the proceeds from the issuance of the 2020 Notes to refinance then-outstanding debt, for stock repurchases, acquisitions of wealth management firms, as well as other general corporate purposes. Subordinated debt is presented net of issuance cost on the Consolidated Statements of Condition. The subordinated debt issuances are included in the Company’s regulatory total capital amount and ratio. In connection with the issuance of the 2020 Notes, the Company obtained ratings from Kroll Bond Rating Agency (“KBRA”) and Moody’s Investors Service (“Moody’s”). KBRA assigned investment grade rating of BBB- and Moody’s assigned investment grade rating of Baa3 for the 2020 Notes at the time of issuance. ***ALLOWANCE FOR CREDIT LOSSES AND RELATED PROVISION***: The allowance for credit losses was $60.8 million at December 31, 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 recorded in connection with the implementation of CECL on January 1, 2022, and net charge-offs of $1.2 million partially offset by the 2022 provision for credit losses of $6.4 million. At December 31, 2022, the allowance for credit losses as a percentage of total loans outstanding was 1.15 percent compared to 1.28 percent at December 31, 2021. The provision for credit losses was $6.4 million for 2022, $6.5 million for 2021 and $32.4 million for 2020. 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. In determining an appropriate amount for the allowance, the Bank segments and aggregates the loan portfolio based on common characteristics. The following segments have been identified: a) Primary Residential Mortgages. The Bank originates one to four family residential mortgage loans in the Tri-State area (New York, New Jersey and Connecticut), Pennsylvania and Florida. On a case-by-case basis, the Bank will lend in additional states. When reviewing residential mortgage loan applications, detailed verifiable information is gathered on income, assets, employment and a tri-merged credit report obtained from a credit repository that will determine total monthly debt obligations. Utilizing an independent appraisal from an approved appraisal management company, the Bank makes residential mortgage loans up to 80 percent of the appraised value and up to 97 percent with private mortgage insurance. Maximum loan-to-value (“LTV”) is determined based on property type and loan amount. On primary residences and second home properties, LTVs range from a maximum of 80 percent for loan amounts to $1,089,300 for retail customers to 75 percent for loan amounts to $3 million for customers of our wealth management business line. For investment properties, LTVs range from a maximum of 80 percent for loan amounts to $726,200 for retail customers to 65 percent for loan amounts to $3 million for wealth customers. Loans greater than $3 million will also be considered based on the strength of the overall credit profile of the borrower. Underwriting guidelines include (i) minimum credit report scores of 680 and (ii) a maximum debt to income ratio of 45 percent. The Bank may consider an exception to any guideline if there are strong compensating factors that address and mitigate any risk. Generally, the Bank retains in its portfolio residential mortgage loans with fixed rate maturities of no greater than seven years, which then convert to annually adjusted floating rates. Community Development loans granted under the Affordable Housing Program are offered with 30-year maturities. Loans with longer maturities or lower credit scores are sold to secondary market investors. The Bank does not originate, purchase or carry any sub-prime mortgage loans. Risk characteristics associated with primary residential mortgage loans typically involve major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as for major medical issues or catastrophic events; and divorce or death. In addition, residential mortgage loans that have adjustable rates could expose the borrower to higher debt service requirements in a rising interest rate environment. Further, real estate values could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential exposure for the Bank. b) Junior Lien Loan on Residence (which include home equity lines of credit). The Bank provides junior lien loans (“JLL”) and revolving home equity lines of credit against one to four family properties in the Tri-State area. Junior lien loans can be either in the form of an amortizing fixed rate home equity loan or a revolving home equity line of credit. These loans are subordinate to a first mortgage which may be from another lending institution. The Bank requires that the mortgage securing the JLL be no lower than a second lien position. When reviewing the JLL application, the Bank collects detailed verifiable information regarding income, assets, employment and a credit report that determines total monthly debt obligations. The Bank uses an automated valuation model on all JLLs and lines up to $250,000 and obtains an independent appraisal of the subject property on all applications exceeding $250,000. LTVs and combined LTVs are capped at 75 percent for JLLs and 80 percent for home equity lines of credit, if the property type is a primary residence. All applications for JLLs adhere to applicable underwriting standards and guidelines. Exceptions can be made to these guidelines with compensating factors that address and mitigate the risk associated with the exception. Primary risk characteristics associated with JLLs typically involve major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as for major medical issues or catastrophic events; and divorce or death. In addition, home equity lines of credit typically are made with variable or floating interest rates, such as the Prime Rate, which could expose the borrower to higher debt service requirements in a rising interest rate environment. Further, real estate values could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential exposure for the Bank. c) Multifamily Loans. Multifamily loans are commercial mortgages on residential apartment buildings. Within the multifamily sector, the Bank’s primary focus is to lend against larger non-luxury apartment buildings and rent regulated properties with at least 30 units that are owned and managed by experienced sponsors. As of December 31, 2022, the average property size in the portfolio was 45 units. Multifamily loans are expected to be repaid from the cash flows of the underlying property so the collective amount of rents must be sufficient to cover all operating expense, maintenance, taxes and debt service. Increases in vacancy rates, interest rates or other changes in general economic conditions can have an impact on the borrower and their ability to repay the loan. Certain markets, such as the Boroughs of New York City, are rent regulated, and as such, feature rents that are considered to be below market rates. Generally, rent regulated properties are characterized by relatively stable occupancy levels and longer-term tenants. As a loan asset class for many banks, multifamily loans have experienced much lower historical loss rates compared to other types of commercial lending. The Bank’s loan policy allows loan to appraised value ratios of up to 75 percent and the overall portfolio average loan to value ratio was approximately 59 percent at December 31, 2022 based on appraisals at the time of origination. The majority of all new originations have a ten-year maturity with a repricing of the interest rate after five years. Multifamily loan terms include prepayment penalties and generally require that the Bank escrow for real estate taxes. Multifamily loans will typically have a minimum debt service coverage ratio that provides for an adequate cushion for unexpected or uncertain events and changes in market conditions. In the loan underwriting process, the Bank requires an independent appraisal and review, appropriate environmental due diligence and an assessment of the property’s condition. Multifamily properties generally present a lower level of risk as compared to investment commercial real estate projects given that there are a larger number of tenants in the property. The repayment of loans secured by multifamily real estate is typically dependent upon the successful operation of the related real estate property. If the cash flows from the property are reduced (for example, if leases are not obtained or renewed, or a bankruptcy court modifies a lease term), the borrower’s ability to repay the loan may be impaired. d) Owner-Occupied Real Estate Loans. The Bank provides mortgage loans for owner-occupied commercial real estate properties in the Tri-State area and Pennsylvania. The terms and conditions of all commercial mortgage loans are tailored to the specific attributes of the borrower and any guarantors as well as the nature of the property and loan purpose. Commercial real estate loans are generally considered to have a higher degree of credit risk than multifamily loans as they may be dependent on the ongoing success and operating viability of a fewer number of tenants who are occupying the property and who may have a greater degree of exposure to various industry or economic conditions. To mitigate this risk, the Bank generally requires an assignment of leases, direct recourse to the owners, and a risk appropriate interest rate and loan structure. In underwriting an investment commercial real estate loan, the Bank evaluates the property’s historical operating income as well as its projected sustainable cash flows and generally requires a minimum debt service coverage ratio that provides for an adequate cushion for unexpected or uncertain events and changes in market conditions. With an owner-occupied property, a detailed credit assessment is made of the operating business since its ongoing success and profitability will be the primary source of repayment. While owner-occupied properties include the real estate as collateral, the risk assessment of the operating business is more similar to the underwriting of commercial and industrial loans (described below). The Bank evaluates factors such as, but not limited to, the expected sustainability of profits and cash flows, the depth and experience of management and ownership, the nature of competition, and the impact of forces like regulatory change and evolving technology. Commercial mortgage loans are generally made with an initial fixed rate with periodic rate resets every five or seven years over an underlying market index. Resets may not be automatic and subject to re-approval. Commercial mortgage loan terms include prepayment penalties and generally require that the Bank escrow for real estate taxes. The Bank requires an independent appraisal, an assessment of the property’s condition, and appropriate environmental due diligence. With all commercial real estate loans, the Bank’s standard practice is to require a depository relationship. e) Investment Commercial Real Estate Loans. The Bank provides mortgage loans for properties managed as an investment property (non-owner-occupied) in the Tri-State area and Pennsylvania. The terms and conditions of all commercial mortgage loans are tailored to the specific attributes of the borrower and any guarantors as well as the nature of the property and loan purpose. In the case of investment commercial real estate properties, the Bank reviews, among other things, the composition and mix of the underlying tenants, terms and conditions of the underlying tenant lease agreements, the resources and experience of the sponsor, and the condition and location of the subject property. Commercial real estate loans are generally considered to have a higher degree of credit risk than multifamily loans as they may be dependent on the ongoing success and operating viability of a fewer number of tenants who are occupying the property and who may have a greater degree of exposure to various industry or economic conditions. To mitigate this risk, the Bank generally requires an assignment of leases, direct recourse to the owners, and a risk appropriate interest rate and loan structure. In underwriting an investment commercial real estate loan, the Bank evaluates the property’s historical operating income as well as its projected sustainable cash flows and generally requires a minimum debt service coverage ratio that provides for an adequate cushion for unexpected or uncertain events and changes in market conditions. Commercial mortgage loans are generally made with an initial fixed rate with periodic rate resets every five or seven years over an underlying market index. Resets may not be automatic and subject to re-approval. Commercial mortgage loan terms include prepayment penalties and generally require that the Bank escrow for real estate taxes. The Bank requires an independent appraisal, an assessment of the property’s condition, and appropriate environmental due diligence. With all commercial real estate loans, the Bank’s standard practice is to require a depository relationship. f) Commercial and Industrial Loans. The Bank provides lines of credit and term loans to operating companies for business purposes. The loans are generally secured by business assets such as accounts receivable, inventory, business vehicles and equipment as well as the stock of the company, if privately held. In addition, these loans often include commercial real estate as collateral to strengthen the Bank’s position and further mitigate risk. When underwriting business loans, among other things, the Bank evaluates the historical profitability and debt servicing capacity of the borrowing entity and the financial resources and character of the principal owners and guarantors. Commercial and industrial loans are typically repaid first by the cash flows generated by the borrower’s business. The primary risk characteristics are specific to the underlying business and its ability to generate sustainable profitability and resulting positive cash flows. Factors that may influence a business’ profitability include, but are not limited to, demand for its products or services, quality and depth of management, degree of competition, regulatory changes, and general economic conditions. Commercial and industrial loans are generally secured by business assets; however, the ability of the Bank to foreclose and realize sufficient value from the assets is often highly uncertain. To mitigate the risk characteristics of commercial and industrial loans, the Bank often requires more frequent reporting requirements from the borrower in order to better monitor its business performance. g) Leasing and Equipment Finance. Peapack Capital Corporation (“PCC”), a subsidiary of the Bank, offers a range of finance solutions nationally. PCC provides term loans and leases secured by assets financed for U.S. based mid-size and large companies. Facilities tend to be fully drawn under fixed-rate terms. PCC serves a broad range of industries including transportation, manufacturing, heavy construction and utilities. Asset risk in PCC’s portfolio is generally recognized through changes to loan income, or through changes to lease related income streams due to fluctuations in lease rates. Changes to lease income can occur when the existing lease contract expires, the asset comes off lease, or the business seeks to enter a new lease agreement. Asset risk may also change depreciation, resulting from changes in the residual value of the operating lease asset or through impairment of the asset carrying value, which can occur at any time during the life of the asset. Credit risk in PCC’s portfolio generally results from the potential default of borrowers or lessees, which may be driven by customer specific or broader industry related conditions. Credit losses can impact multiple parts of the income statement including loss of interest/lease/rental income and/or via higher costs and expenses related to the repossession, refurbishment, re-marketing and or re-leasing of assets. h) Construction. The Bank provides commercial construction loans for properties located in the Tri-state area. Risks common to commercial construction loans are cost overruns, changes in market demand for property, inadequate long-term financing arrangements and declines in real estate values. Changes in market demand for property could lead to longer marketing times resulting in higher carrying costs, declining values, and higher interest rates. i) Consumer and Other. These are loans to individuals for household, family and other personal expenditures as well as obligations of states and political subdivisions in the U.S. This also represents all other loans that cannot be categorized in any of the previous mentioned loan segments. Consumer loans generally have higher interest rates and shorter terms than residential loans but tend to have higher credit risk due to the type of collateral securing the loan or in some cases the absence of collateral. Management believes that the underwriting guidelines previously described adequately address the primary risk characteristics. Further, the Bank has dedicated staff and resources to monitor and collect on any potentially problematic loans. 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, nature and volume 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. 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 less qualitative factors as it uses economic factors and considers relevant available information from internal and external sources related to past events and calculates losses based on discounted cash flows on an individual loan basis. Accordingly, the CECL model quantitatively accounts for some of the qualitative factors utilized in the incurred loss methodology. The following table presents the credit loss experience, by loan type, during the years ended December 31: *(Dollars in thousands)* | | 2022 | 2021 | 2020 | 2019 | 2018 | | --- | ---: | ---: | ---: | ---: | ---: | | Average loans outstanding | **$5,105,200** | $4,494,473 | $4,552,358 | $4,035,603 | $3,762,322 | | Allowance for credit losses at beginning of year (A) | **$61,697** | $67,309 | $43,676 | $38,504 | $36,440 | | Day one CECL adjustment | **(5,536)** | — | **—** | — | — | | Loans charged-off during the period: | | | | | | | Residential mortgage | **—** | 12 | 559 | 80 | 138 | | Commercial mortgage | **1,450** | 7,137 | 1,485 | — | 1,632 | | Commercial | **—** | 5,019 | 7,132 | — | 110 | | Home equity lines of credit | **3** | — | **—** | — | — | | Consumer and other | **53** | 80 | 27 | 55 | 68 | | Total loans charged-off | **1,506** | 12,248 | 9,203 | 135 | 1,948 | | Recoveries during the period: | | | | | | | Residential mortgage | **15** | — | 373 | 205 | 160 | | Commercial mortgage | **—** | — | 31 | 996 | 70 | | Commercial | **254** | 66 | 17 | 92 | 218 | | Home equity lines of credit | **—** | 85 | 11 | 10 | 10 | | Consumer and other | **2** | 10 | 4 | 4 | 4 | | Total recoveries | **271** | 161 | 436 | 1,307 | 462 | | Net charge-offs/(recoveries) | **1,235** | 12,087 | 8,767 | (1,172) | 1,486 | | Provision charge to expense | **5,903** | 6,475 | 32,400 | 4,000 | 3,550 | | Allowance for credit losses at end of year | **$60,829** | $61,697 | $67,309 | $43,676 | $38,504 | | Ratios: | | | | | | | Allowance for credit losses/total loans (B) | **1.15%** | 1.28% | 1.54% | 0.99% | 0.98% | | Allowance for loans collectively evaluated/total loans (B) | **1.12%** | 1.20% | 1.48% | 0.93% | 0.97% | | Nonaccrual loans/total loans (B) | **0.36%** | 0.32% | 0.26% | 0.66% | 0.65% | | Allowance for credit losses/ total nonperforming loans | **320.59%** | 396.18% | 589.91% | 151.23% | 149.73% | | Net charge offs/average loans: | | | | | | | Residential mortgage | **0.00%** | 0.00% | 0.00% | -0.01% | 0.00% | | Commercial mortgage | **0.03%** | 0.16% | 0.03% | -0.02% | 0.04% | | Commercial | **0.00%** | 0.11% | 0.16% | 0.00% | 0.00% | | Home equity lines of credit | **0.00%** | 0.00% | 0.00% | 0.00% | 0.00% | | Consumer and other | **0.00%** | 0.00% | 0.00% | 0.00% | 0.00% | | Total net charge offs/average loans | **0.02%** | 0.27% | 0.19% | -0.03% | 0.04% | (A) 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. Provision to roll forward the ACL excludes a provision of $450,000 at December 31, 2022 related to off-balance sheet commitments. (B) The December 31, 2022, 2021 and 2020 ACL coverage ratios include PPP loans of $1.7 million, $13.8 million and $195.6 million, respectively. The following table shows the allocation of the allowance for credit losses and the percentage of each loan category, by collateral type, to total loans as of December 31, of the years indicated: *(Dollars in thousands)* | | 2022 | % of Loan Category To Total Loans | 2021 | % of Loan Category To Total Loans | 2020 | % of Loan Category To Total Loans | 2019 | % of Loan Category To Total Loans | 2018 | % of Loan Category To Total Loans | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Residential | **$3,048** | **10.7** | $1,520 | 11.3 | $3,138 | 13.0 | $2,231 | 14.6 | $3,685 | 17.1 | | Commercial and other | **57,244** | **88.5** | 59,962 | 87.8 | 63,892 | 86.0 | 41,149 | 84.1 | 34,435 | 81.2 | | Consumer and other | **537** | **0.8** | 215 | 0.9 | 279 | 1.0 | 296 | 1.3 | 384 | 1.7 | | Total | **$60,829** | **100.0** | $61,697 | 100.0 | $67,309 | 100.0 | $43,676 | 100.0 | $38,504 | 100.0 | 49 The allowance for credit losses as of December 31, 2022 totaled $60.8 million compared to $61.7 million at December 31, 2021. The allowance for credit losses as a percentage of loans was 1.15 percent as of December 31, 2022 and 1.28 percent as of December 31, 2021. The provision for credit losses for 2022 totaled $6.4 million, which included a provision for off-balance sheet commitments of $450,000 compared with $6.5 million for 2021. The Company believes that the allowance for credit losses as of December 31, 2022, represents a reasonable estimate for probable incurred losses in the portfolio at that date. The portion of the allowance for credit losses allocated to loans collectively evaluated for impairment, commonly referred to as general reserves, was $59.3 million at December 31, 2022 and $57.5 million at December 31, 2021. General reserves at December 31, 2022 represented 1.12 percent of loans collectively evaluated for impairment compared to 1.20 percent at December 31, 2021. The specific reserves on individually evaluated loans were $1.5 million at December 31, 2022 compared to $4.2 million at December 31, 2021. Specific reserves were largely attributable to a $1.2 million reserve associated with one commercial real estate loan with a large retail component totaling $11.2 million at December 31, 2022. The allowance for credit losses as a percentage of nonperforming loans decreased to 320.59 percent due to an increase in nonperforming loans and the CECL Day 1 adjustment of $5.5 million. Nonperforming loans increased from $15.6 million to $19.0 million during the year. Nonperforming loans are specifically evaluated for impairment. Also, the Company commonly records partial charge-offs of the excess of the principal balance over the fair value, less estimated costs to sell, of collateral for collateral-dependent impaired loans. As a result, the allowance for credit losses does not always change proportionately with changes in nonperforming loans. The Company charged off $1.5 million on loans identified as collateral-dependent individually evaluated loans during 2022 and $12.2 million on loans identified as collateral-dependent impaired loans during 2021, which included a $7.1 million charge-off of the specific reserve on the above mentioned commercial real estate loan. ***ASSET QUALITY***: The following table presents various asset quality data at the dates indicated. These tables do not include loans held for sale. *(Dollars in thousands)* | | December 31, 2022 | 2021 | 2020 | 2019 | 2018 | | --- | ---: | ---: | ---: | ---: | ---: | | Loans past due 30-89 days (1) | **$7,592** | $8,606 | $5,053 | $1,910 | $1,099 | | Troubled debt restructured loans | **$14,318** | $3,575 | $4,247 | $28,178 | $24,801 | | Loans past due 90 days or more and still accruing interest | **$—** | $— | $— | $— | $— | | Nonaccrual loans (2) | **18,974** | 15,573 | 11,410 | 28,881 | 25,715 | | Total nonperforming loans | **18,974** | 15,573 | 11,410 | 28,881 | 25,715 | | Other real estate owned | **116** | — | 50 | 50 | — | | Total nonperforming assets | **$19,090** | $15,573 | $11,460 | $28,931 | $25,715 | | Ratios: | | | | | | | Total nonperforming loans/total loans | **0.36%** | 0.32% | 0.26% | 0.66% | 0.65% | | Total nonperforming loans/total assets | **0.30** | 0.26 | 0.19 | 0.56 | 0.56 | | Total nonperforming assets/total assets | **0.30** | 0.26 | 0.19 | 0.56 | 0.56 | 50 (1) Includes $4.5 million outstanding to U.S. governmental entities at December 31, 2022. Includes $6.9 million for one equipment lease principally due to administrative issues with the servicer and at the lessee/borrower at December 31, 2021. (2) The increase in nonaccrual loans in 2021 was due to one large CRE loan with a retail component located in Manhattan. The decrease in nonaccrual loans for 2020 was due to the transfer of several commercial and residential loans totaling $18.5 million to held for sale. The higher balance of nonaccrual loans in 2019 and 2018 was due to the addition of one healthcare real estate secured loan, totaling $14.5 million with a $1.0 million reserve, as of December 31, 2020. At December 31, 2022, there were no commitments to lend additional funds to borrowers whose loans were classified as nonperforming. **Loan Modifications:** Some borrowers have found it difficult to make their loan payments under contractual terms. In some of these cases, the Company has chosen to grant concessions and modify certain loan terms, which may be characterized as troubled debt restructurings. The CARES Act granted relief to borrowers that needed loan deferrals due to the impact of the COVID-19 pandemic. The CARES Act allows financial institutions to suspend application of certain current TDR accounting guidance under ASC 310-40 for loan modifications related to the COVID-19 pandemic made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 national emergency, provided certain criteria are met. The revised CARES Act extended TDR relief to loan modifications through January 1, 2022. This relief can be applied to loan modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan modifications that defer or delay the payment of principal or interest or change the interest rate on the loan. In April 2020, federal and state banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide further interpretation of when a borrower is experiencing financial difficulty, specifically indicating that if the modification is either short-term (e.g., six months) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not considered to be experiencing financial difficulty under ASC 310-40. Under this revised guidance, the Bank had modified 542 loans with a balance of $947.0 million resulting in the deferral of principal and/or interest for periods ranging from 90 to 180 days. As of December 31, 2022, all of these loans resumed contractual payments and were removed from deferral status. ***TROUBLED DEBT RESTRUCTURINGS***: The following table presents the troubled debt restructured loans, by collateral type, at December 31, 2022 and 2021: *(Dollars in thousands)* | | December 31, 2022 | Number of Relationships | December 31, 2021 | Number of Relationships | | --- | ---: | ---: | ---: | ---: | | Primary residential mortgage | **$1,366** | **9** | $1,468 | 9 | | Junior lien loan on residence | **15** | **1** | 18 | 1 | | Investment commercial real estate | **11,208** | **1** | — | — | | Commercial and industrial | **1,729** | **1** | 2,089 | 2 | | Total | **$14,318** | **12** | $3,575 | 12 | At December 31, 2022, there were $13.4 million of troubled debt restructured loans included in nonaccrual loans compared to $1.1 million at December 31, 2021. At December 31, 2022, $13.2 million troubled debt restructured loans are considered and included in the individually evaluated loans and had specific reserves of $1.2 million. All $3.6 million of troubled debt restructured loans are considered and included in impaired loans at December 31, 2021. There was no allowance allocated to troubled debt restructured loans at December 31, 2021. Except as disclosed, the Company did not have any potential problem loans at December 31, 2022 or December 31, 2021 that caused Management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans. Loans individually evaluated for impairment totaled $16.7 million and $18.1 million at December 31, 2022 and 2021, respectively. Individually evaluated loans include nonaccrual loans of $15.8 million and $15.6 million at December 31, 2022 and 2021, respectively. Individually evaluated loans also include accruing troubled debt restructuring loans of $150,000 at December 31, 2022 and $2.5 million at December 31, 2021. The following table presents impaired loans, by collateral type, at December 31, 2022 and 2021: *(Dollars in thousands)* | | December 31, 2022 | Number of Relationships | December 31, 2021 | Number of Relationships | | --- | ---: | ---: | ---: | ---: | | Primary residential mortgage | **$374** | **3** | $2,242 | 14 | | Junior lien loan on residence | **—** | **—** | 18 | 1 | | Owner-occupied commercial real estate | **—** | **—** | 458 | 2 | | Investment commercial real estate | **11,208** | **1** | 12,750 | 1 | | Commercial and industrial | **3,385** | **7** | **—** | **—** | | Lease financing | **1,765** | **4** | 2,584 | 4 | | Total | **$16,732** | **15** | $18,052 | 22 | | Specific reserves, included in the allowance for loan losses | **$1,507** | | $4,234 | | ***CONTRACTUAL OBLIGATIONS***: Leases represent obligations entered into by the Company for the use of land and premises. The leases generally have escalation terms based upon certain defined indexes. Common area maintenance charges may also apply and are adjusted annually based on the terms of the lease agreements. The Company adopted the guidance in Topic 842 Leases effective January 1, 2019. See Note 1 to Notes to Consolidated Financial Statements for further discussion. Purchase obligations represent legally binding and enforceable agreements to purchase goods and services from third parties and consist of contractual obligations under data processing service agreements. The Company also enters into various routine rental and maintenance contracts for facilities and equipment. These contracts are generally for one year. The Company is a limited partner in a Small Business Investment Company (“SBIC”). As of December 31, 2022, the Company had unfunded commitments of $11.3 million for its investment in SBIC qualified funds. ***OFF-BALANCE SHEET ARRANGEMENTS***: The following table shows the amounts and expected maturities of significant commitments, consisting primarily of letters of credit, as of December 31, 2022. *(In thousands)* | | Less Than One Year | 1-3 Years | 3-5 Years | More Than 5 Years | Total | | --- | ---: | ---: | ---: | ---: | ---: | | Financial letters of credit | $12,299 | $1,095 | $— | $— | $13,394 | | Performance letters of credit | 2,673 | 4,084 | — | — | 6,757 | | Interest rate lock commitments-residential mortgages | 21,549 | — | — | — | 21,549 | | Total letters of credit | $36,521 | $5,179 | $— | $— | $41,700 | Commitments under standby letters of credit, both financial and performance, do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon. ***OTHER INCOME***: The following table presents the major components of other income (excluding income from our wealth management operations, which is discussed separately): *(In thousands)* | | Years Ended December 31, 2022 | 2021 | 2020 | Change 2022 vs 2021 | 2021 vs 2020 | | --- | ---: | ---: | ---: | ---: | ---: | | Service charges and fees | **$4,225** | $3,697 | $3,155 | $528 | $542 | | Bank owned life insurance | **1,243** | 1,696 | 1,273 | (453) | 423 | | Loan fee income | **4,759** | 1,646 | 1,339 | 3,113 | 307 | | Gains on loans held for sale at fair value (mortgage banking) | **483** | 2,194 | 3,266 | (1,711) | (1,072) | | Loss on securities sale, net | **(6,609)** | — | — | (6,609) | — | | Fair value adjustment for CRA equity security | **(1,700)** | (432) | 281 | (1,268) | (713) | | Fee income related to loan level, back-to-back swaps | **293** | — | 1,620 | 293 | (1,620) | | Gains on loans held for sale at lower of cost or fair value | — | 1,142 | 7,426 | (1,142) | (6,284) | | Gain on sale of SBA loans | **6,765** | 4,939 | 1,766 | 1,826 | 3,173 | | Corporate advisory fee income | **1,704** | 3,483 | 265 | (1,779) | 3,218 | | Loss on swap termination | — | (842) | — | 842 | (842) | | Other income | **603** | 1,733 | 508 | (1,130) | 1,225 | | Total other income | **$11,766** | $19,256 | $20,899 | $(7,490) | $(1,643) | #### 2022 compared to 2021 The Company recorded total other income, excluding wealth management fee income, of $11.8 million in 2022, reflecting a decrease of $7.5 million, or 39 percent, compared to 2021 levels. The decrease for 2022 was primarily attributable to a $6.6 million loss on securities sale. The Company provides loans that are partially guaranteed by the SBA, to provide working capital and/or finance the purchase of equipment, inventory or commercial real estate and that could be used for start-up business. 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. Gain on sale of SBA loans for 2022 increased by $1.8 million to $6.8 million for 2022 compared to $4.9 million in 2021. The 2022 period has benefitted from the addition of an SBA team hired by the Company in the fourth quarter of 2021 offset by slightly higher market volatility, which has resulted in lower sale premiums. The Company recorded corporate advisory fee income of $1.7 million for 2022 compared to $3.5 million for 2021. 2022 included one major corporate advisory/investment banking acquisition transaction while 2021 had two of these events. These transactions tend to be larger and take longer to complete. The Company recorded $293,000 of fee income related to loan level, back-to-back swaps during the twelve months ended December 31, 2022. There were no fees of this type recorded during 2021. The program provides a borrower with a degree of interest rate protection on a variable rate loan, while still providing an adjustable rate to the Company, thus helping to manage the Company’s interest rate risk, while contributing to income. The Company expects back-to-back swap activity will continue to be minimal in the current rate environment. Income from the back-to-back swap, corporate advisory fee income and SBA programs are dependent on volume, and thus are not linear from year to year, as some years will be higher or lower than others. Income from the sale of newly originated residential mortgages loans decreased $1.7 million to $483,000 for the year ended December 31, 2022 when compared to $2.2 million for the same period in 2021. This decrease was a result of the decreased volume of residential mortgage loans originated for sale during 2022 due to a slowdown in refinance and home purchase activity in the current interest rate environment. Other income for 2022 included a $6.6 million loss on the sale of securities due to the Company's balance sheet repositioning in the first quarter of 2022, 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. During the twelve months ended December 31, 2022, the Company recorded a $1.7 million negative fair value adjustment for CRA equity securities compared to $432,000 for 2021. The increase in the negative fair value adjustment was due to the higher interest rate environment experienced in 2022. Loan fee income included $2.2 million of unused commercial credit line fees in 2022 compared to $655,000 for 2021. Additionally, the Company recorded $1.3 million of income by the Equipment Finance Division related to equipment transfers to lessees compared to none in 2021. The twelve months ended December 31, 2022 included a gain on sale of property of $275,000 associated with the closing of retail branches. The Company recorded $25,000 of additional income related to the net life insurance death benefit under its bank owned life insurance (“BOLI”) policies during 2022 compared to $455,000 for the 2021 period. The Company sold loans issued under the PPP totaling $56.5 million during 2021 resulting in a gain on sale of loans of $1.1 million. In addition, the Company sold problem loans totaling $6.7 million resulting in a gain on sale of loans of $282,000 and residential loans totaling $12.2 million resulting in a gain on sale of loans of $362,000. During the year ended December 31, 2021, the Company recorded a $1.1 million gain on sale on the sale of $57 million of PPP loans to a third party. No such loans were sold in 2022. Additionally, the Company recorded $886,000 of fee income related to the referral of PPP loans. During 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 twelve months ended December 31, 2021 included a gain on sale of an other real estate owned (“OREO”) property of $51,000. ***OPERATING EXPENSES***: The following table presents the major components of operating expenses: *(In thousands)* | | Years Ended December 31, 2022 | 2021 | 2020 | Change 2022 vs 2021 | 2021 vs 2020 | | --- | ---: | ---: | ---: | ---: | ---: | | Compensation and employee benefits | **$89,476** | $81,864 | $77,516 | $7,612 | $4,348 | | Premises and equipment | **18,719** | 17,165 | 16,377 | 1,554 | 788 | | FDIC assessment | **1,939** | 2,071 | 1,975 | (132) | 96 | | Other operating expenses: | | | | | | | Professional and legal fees | **5,062** | 5,343 | 4,099 | (281) | 1,244 | | Telephone | **1,460** | 1,323 | 1,432 | 137 | (109) | | Advertising | **1,882** | 1,288 | 1,631 | 594 | (343) | | Amortization of intangible assets | **1,569** | 1,598 | 1,287 | (29) | 311 | | Branch restructure | **201** | 228 | 488 | (27) | (260) | | FHLB prepayment penalty | **—** | — | 4,784 | — | (4,784) | | Valuation allowance loans held for sale | **—** | — | 4,425 | — | (4,425) | | Swap valuation allowance | **673** | 2,243 | — | (1,570) | 2,243 | | Write-off of subordinated debt costs | **—** | 648 | — | (648) | 648 | | Other operating expenses | **12,819** | 12,396 | 10,945 | 423 | 1,451 | | Total operating expense | **$133,800** | $126,167 | $124,959 | $7,633 | $1,208 | #### 2022 compared to 2021 Operating expenses totaled $133.8 million in 2022, compared to $126.2 million in 2021, reflecting an increase of $7.6 million, or 6 percent. Increased operating expenses in 2022 were principally attributable to: (1) a compensation and employee benefits increase of $7.6 million which includes a full year of expenses related to the acquisition of PPSG completed on July 1, 2021, increased corporate and health insurance costs, hiring in line with the Company’s strategic plan and normal annual merit increases, $200,000 of expense related to accelerated restricted stock vesting related to one employee; and (2) $201,000 of expense associated with the consolidation of private banking offices. The Company recorded swap valuation expense of $673,000 and $2.2 million in 2022 and 2021, respectively. The reduction in the swap valuation allowance during 2022 was primarily due to the reduction in borrower exposure to swap breakage, which is a function of the current rate environment. Both 2022 and 2021 included $1.5 million of severance expense related to certain staff reorganizations within several areas of the Bank. The 2021 period included $648,000 of accelerated expense related to the redemption of subordinated debt. ***INCOME TAXES***: Income tax expense for the year ended December 31, 2022 was $28.1 million as compared to $21.0 million for 2021. The effective tax rate for the year ended December 31, 2022 was 27.45 percent as compared to 27.09 percent for the year ended December 31, 2021. The year ended December 31, 2022 included $750,000 of income tax expense (net of Federal benefit) related to the recent approval of legislation that changed the nexus standard for a New York City business tax. ***CAPITAL RESOURCES:*** A solid capital base provides the Company with financial strength and the ability to support future growth and is essential to executing the Company’s Strategic Plan – “Expanding Our Reach.” The Company’s capital strategy is intended to provide stability to expand its businesses, even in stressed environments. Quarterly stress testing is integral to the Company’s capital management process. The Company strives to maintain capital levels in excess of internal “triggers” and in excess of those considered to be well capitalized under regulatory guidelines applicable to banks and bank holding companies. Maintaining an adequate capital position supports the Company’s goal of providing shareholders an attractive and stable long-term return on investment. The Company’s capital position during 2022 was benefitted by net income of $74.2 million which was offset by the purchase of shares of $32.7 million through the Company’s stock repurchase program and a change in unrealized loss on securities, net of tax of $71.1 million. The Company employs quarterly capital stress testing – adverse case and severely adverse case. In the most recent completed stress test on September 30, 2022, under severely adverse case, 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. At December 31, 2022, the Company’s GAAP capital as a percent of total assets was 8.39 percent. At December 31, 2022, the Company’s regulatory leverage, common equity tier 1, tier 1 and total risk-based capital ratios were 8.90 percent, 11.02 percent, 11.02 percent and 14.73 percent, respectively. At December 31, 2022, the Bank’s regulatory leverage, common equity tier 1, tier 1 and total risk-based capital ratios were 10.85 percent, 13.45 percent, 13.45 percent and 14.67 percent, respectively. The Company’s and the Bank’s regulatory capital ratios are all above the ratios to be considered well capitalized under regulatory guidance. As a result of the enacted 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 new Community Bank Leverage Ratio at 9 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 10.85 percent at December 31, 2022. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, common equity Tier I and Tier I leverage ratios as set forth in the table. The Bank’s regulatory capital amounts and ratios are presented in the following table: *(Dollars in thousands)* | As of December 31, 2022: Total capital | Actual Amount | Ratio | To Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio | For Capital Adequacy Purposes Amount | Ratio | For Capital Adequacy Purposes Including Capital Conservation Buffer (A) Amount | Ratio | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | (to risk-weighted assets) | **$741,719** | **14.67%** | **$505,760** | **10.00%** | **$404,608** | **8.00%** | **$531,048** | **10.50%** | | Tier I capital | | | | | | | | | | (to risk-weighted assets) | **680,137** | **13.45** | **404,608** | **8.00** | **303,456** | **6.00** | **429,896** | **8.50** | | Common equity tier I | | | | | | | | | | (to risk-weighted assets) | **680,119** | **13.45** | **328,744** | **6.50** | **227,592** | **4.50** | **354,032** | **7.00** | | Tier I capital | | | | | | | | | | (to average assets) | **680,137** | **10.85** | **313,328** | **5.00** | **250,662** | **4.00** | **250,662** | **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 | 56 The Company’s regulatory capital amounts and ratios are presented in the following table: *(Dollars in thousands)* | As of December 31, 2022: Total capital | Actual Amount | Ratio | To Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio | For Capital Adequacy Purposes Amount | Ratio | For Capital Adequacy Purposes Including Capital Conservation Buffer (A) Amount | Ratio | | --- | ---: | ---: | --- | --- | ---: | ---: | ---: | ---: | | (to risk-weighted assets) | **$745,197** | **14.73%** | **N/A** | **N/A** | **$404,830** | **8.00%** | **$531,340** | **10.50%** | | Tier I capital | | | | | | | | | | (to risk-weighted assets) | **557,627** | **11.02** | **N/A** | **N/A** | **303,623** | **6.00** | **430,132** | **8.50** | | Common equity tier I | | | | | | | | | | (to risk-weighted assets) | **557,609** | **11.02** | **N/A** | **N/A** | **227,717** | **4.50** | **354,227** | **7.00** | | Tier I capital | | | | | | | | | | (to average assets) | **557,627** | **8.90** | **N/A** | **N/A** | **250,746** | **4.00** | **250,746** | **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 percent “capital conservation buffer” on top of the minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of (i) CET1 to risk-weighted assets, (ii) Tier 1 capital to risk-weighted assets or (iii) total capital to risk-weighted assets above the respective minimum but below the capital conservation buffer face constraints on dividends, equity repurchases and discretionary bonus payments to executive officers based on the amount of the shortfall. The 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 through the Plan in both 2022 and 2021 were purchased in the open market. 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 and loan participations. Management actively monitors and manages the Company’s liquidity position and believes it is sufficient to meet future needs. Cash and cash equivalents, including federal funds sold and interest-earning deposits, totaled $190.1 million at December 31, 2022. In addition, the Company had $554.6 million in securities designated as available for sale at December 31, 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 $453.7 million and $102.3 million, as of December 31, 2022, respectively, were pledged to secure public funds and for other purposes required or permitted by law. However, only $49.6 million of that total is actually encumbered. In addition, the Company generates significant liquidity from scheduled and unscheduled principal repayments of loans and mortgage-backed securities. As of December 31, 2022, the Company had approximately $1.5 billion of secured funding available from the FHLB and had $1.8 billion of secured funding available from the Federal Reserve Discount Window, none of which was drawn. Brokered interest-bearing demand (“overnight”) deposits decreased $25.0 million to $60.0 million at December 31, 2022. The interest rate paid on these deposits allows the Bank to fund operations 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 December 31, 2022, the Company has 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. 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. Peapack-Gladstone Financial Corporation is a separate legal entity from the Bank and must provide for its own liquidity to pay dividends to its shareholders, to repurchase shares of its common stock, and for other corporate purposes. Peapack-Gladstone Financial Corporation’s primary source of income is dividends received from the Bank. The Bank’s ability to pay dividends is governed by applicable law. In December 2020, the Company issued the 2020 Notes to certain institutional investors and retained $98.2 million of proceeds. At December 31, 2022, Peapack-Gladstone Financial Corporation (unconsolidated basis) had liquid assets of $8.5 million. Management believes the Company’s liquidity position and sources were adequate at December 31, 2022. ***EFFECTS OF INFLATION AND CHANGING PRICES:*** The financial statements and related financial data presented herein have been prepared in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than do general levels of inflation. ***PEAPACK PRIVATE:*** This division includes: investment management services provided for individuals and institutions; personal trust services, including services as executor, trustee, administrator, custodian and guardian, and other financial planning, tax preparation and advisory services. Officers from Peapack Private are available to provide wealth management, trust and investment services at the Bank’s headquarters in Bedminster, New Jersey at private banking locations in Morristown, Princeton, Red Bank, Summit and Teaneck, New Jersey and at the Bank’s subsidiary, PGB Trust & Investments of Delaware in Greenville, Delaware. The following table presents certain key aspects of the Peapack Private’s performance for the years ended December 31, 2022, 2021 and 2020. *(In thousands)* | | Years Ended December 31, 2022 | 2021 | 2020 | Change 2022 vs 2021 | 2021 vs 2020 | | --- | ---: | ---: | ---: | ---: | ---: | | Total fee income | **$54,651** | $52,987 | $40,861 | $1,664 | $12,126 | | Compensation and benefits (included in | | | | | | | Operating Expenses section above) | **27,501** | 24,894 | 23,472 | 2,607 | 1,422 | | Other operating expense (included in | | | | | | | Operating Expenses section above) | **13,021** | 13,020 | 11,718 | 1 | 1,302 | | Assets under management and/or | | | | | | | administration (AUM) (market value) | **9.9 billion** | 11.1 billion | 8.8 billion | | | 58 #### 2022 compared to 2021 The market value of assets under management and/or administration (“AUM”) at December 31, 2022 and 2021 was $9.9 billion and $11.1 billion, respectively, a decrease of 11 percent, primarily due to the decline in the value of equity securities during the year. This includes assets held at the Bank at December 31, 2022 and 2021 of $372.5 million and $275.6 million, respectively. Effective December 18, 2020, the Bank completed the hires of the teams from Lucas, based in Red Bank, New Jersey, and from Noyes, based in New Vernon, New Jersey, which combined contributed approximately $400 million of AUM/AUA at the time of acquisition. Effective July 1, 2021, the Bank closed on the acquisition of PPSG, a registered investment advisor headquartered in Princeton, New Jersey, which contributed approximately $520 million of AUM/AUA at the time of acquisition. Peapack Private management fees increased $1.7 million, or 3 percent, to $54.7 million for the year ended December 31, 2022 from $53.0 million in 2021. The growth in fee income was due to the acquisitions noted above and new business partially offset by negative market performance and normal levels of disbursements and outflows. Peapack Private expenses increased to $40.5 million for the year ended December 31, 2022 from $37.9 million for 2021, an increase of $2.6 million, or 7 percent. Other operating expenses were flat for the year ended 2022 when compared to 2021. Compensation and benefits expense totaled $27.5 million and $24.9 million for the years ended December 31, 2022 and 2021, respectively, increasing $2.6 million or 10 percent. Operating expenses relative to Peapack Private reflected increases due to overall growth in the business, new hires and acquisitions which include a full year of expenses of PPSG in 2022. Remaining 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. ## Market risk As filed, 7,167 characters. The Company’s Asset/Liability Committee (“ALCO”) is responsible for developing, implementing and monitoring asset/liability management strategies and advising the Board of Directors on such strategies, as well as the related level of interest rate risk. In this regard, interest rate risk simulation models are prepared on a quarterly basis. These models demonstrate balance sheet gaps and predict changes to net interest income and economic/market value of portfolio equity under various interest rate scenarios. In addition, these models, as well as ALCO processes and reporting, are subject to annual independent third-party review. ALCO generally manages interest rate risk through the management of capital, cash flows and the duration of assets and liabilities, including sales and purchases of assets, as well as additions of wholesale borrowings and other sources of medium/longer-term funding. ALCO engages 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 ALCO and follows procedures and documentation in accordance with regulatory guidance and standards as set forth in ASC 815 for cash flow hedges. The program incorporates pre-purchase analysis, liability designation, sensitivity analysis, correlation analysis, daily mark-to-market analysis and collateral posting as required. The Board is advised of all swap activity. In these swaps, the Company is receiving floating and paying fixed interest rates with total notional value of $290.0 million as of December 31, 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 December 31, 2022, $612.2 million of notional value in swaps were executed and outstanding with borrowers under this program. As noted above, ALCO uses simulation modeling to analyze the Company’s net interest income sensitivity, as well as the Company’s economic value of portfolio equity under various interest rate scenarios. The 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 December 31, 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 December 31, 2022. In an immediate and sustained 100 basis point increase in market rates at December 31, 2022, net interest income would decrease approximately 0.2 percent for year 1 and increase 2.7 percent for year 2, compared to a flat interest rate scenario. The Company's interest rate sensitivity models indicate that the Company is slightly liability sensitive at December 31, 2022 as net interest income would remain relatively flat in a rising rate environment. In an immediate and sustained 200 basis point increase in market rates at December 31, 2022, net interest income for year 1 would increase approximately 0.4 percent, when compared to a flat interest rate scenario. In year 2, this sensitivity improves to an increase of 5.7 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 December 31, 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 | $766,221 | $(61,956) | (7.48)% | 13.08% | (41) | | +100 | 795,791 | (32,386) | (3.91) | 13.27 | (22) | | Flat interest rates | 828,177 | — | — | 13.49 | — | | -100 | 892,228 | 64,051 | 7.73 | 14.11 | 62 | | -200 | 894,707 | 66,530 | 8.03 | 13.87 | 38 | (1) EVPE is the discounted present value of expected cash flows from assets and liabilities. (2) Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets. (3) EVPE ratio represents EVPE divided by the present value of assets. Certain shortcomings are inherent in the methodologies used in determining interest rate risk. Simulation modeling requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the modeling assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the information provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results. The Company’s interest rate sensitivity models indicate the Company is asset sensitive as of December 31, 2022, and that net interest income would be expected to increase in a rising rate environment but decline in a falling rate environment. ## Controls and procedures As filed, 7,031 characters. ### Management’s Evaluation of Disclosure Controls and Procedures The Company maintains “disclosure controls and procedures” which, consistent with Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is defined to mean controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that such information is accumulated and communicated to the Company’s Management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s Management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this Annual Report on Form 10-K. The Company’s Management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, provides reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system reflects resource constraints; the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns occur because of simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by Management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions; over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. ### Remediation of Material Weakness in Internal Control Over Financial Reporting As previously disclosed in our March 31, 2022 Form 10-Q, our Management, including 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 the 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. Management took several measures to remediate the material weakness related to the design of CECL controls, which included designing and implementing formal procedures and controls over the timing of the operation of such controls and engaged third-party advisors to assist with documentation over these controls. Management considers the material weakness described above remediated after the applicable controls operated for a sufficient period of time, allowing Management to test the operation effectiveness and has concluded that the Company's internal control over financial reporting was effective as of December 31, 2022. ### Changes in Internal Control over Financial Reporting There have been no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. ### Management’s Report on Internal Control Over Financial Reporting The Company’s Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance to the Company’s Management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As of December 31, 2022, Management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in 2013 *Internal Control-Integrated Framework,* issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission. Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operating effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit and Risk Committees. Based on this assessment, Management determined that, as of December 31, 2022, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. ### Report of the Independent Registered Public Accounting Firm Crowe LLP, the independent registered public accounting firm that audited the Company’s December 31, 2022 consolidated financial statements included in this Annual Report on Form 10-K, has issued an audit report expressing an opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. The report is included in Item 8 under the heading “Report of Independent Registered Public Accounting Firm.” Filed Mar 13, 2023. Source: SEC EDGAR, the filing index for accession 0000950170-23-007575. Last ingested by Listed: Nov 6, 2026, 13:09 ET. No prices; not investment advice.