# Peapack Gladstone Financial Corp: Form 10-Q for the period ended Mar 31, 2023

- Company: [Peapack Gladstone Financial Corp](/companies/pgc.md) (CIK 1050743)
- Form: 10-Q
- Filed: 2023-05-09
- Accepted by EDGAR: May 9, 2023, 14:32 ET
- Period: 2023-03-31
- Accession: 0000950170-23-019455
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1050743/000095017023019455/pgc-20230331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1050743/000095017023019455/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $62.0m | us-gaap:Revenues |
| Interest expense | 3 months, 2023-01-01 to 2023-03-31 | $26.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | $6.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | $18.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | $1.01 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | $1.03 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 18,263,310 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $39.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-01-01 to 2023-03-31 | $643.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2023-01-01 to 2023-03-31 | $883.0k | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 3 months, 2023-01-01 to 2023-03-31 | $2.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2023-03-31 | $6.48bn | us-gaap:Assets |
| Total liabilities | at 2023-03-31 | $5.93bn | us-gaap:Liabilities |
| Short-term borrowings | at 2023-03-31 | $378.8m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2023-03-31 | $555.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 65,076 characters.

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

### AND RESULTS OF OPERATIONS

**FORWARD LOOKING STATEMENTS:** This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about Management’s confidence and strategies and Management’s expectations about operations, growth, financial results, new and existing programs and products, investments, relationships, opportunities and market conditions. These statements may be identified by such forward-looking terminology as “expect”, “look”, “believe”, “anticipate”, “may”, or similar statements or variations of such terms. Actual results may differ materially from such forward-looking statements. Factors that may cause results to differ materially from those contemplated by such forward-looking statements include, among others, those risk factors identified in the Company’s Form 10-K for the year ended December 31, 2022, in addition to/which include the following:

- 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 a 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;
- successful cyberattacks against our IT infrastructure and that of our IT and third-party providers;
- higher than expected FDIC insurance premiums;
- adverse weather conditions;
- the current or anticipated impact of military conflict, terrorism or other geopolitical events;
- our inability to successfully generate new business in new geographic markets;
- a reduction in our lower-cost funding sources;
- changes in liquidity, including the size and composition of our deposit portfolio, including the percentage of uninsured deposits in the portfolio;
- 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;
- a default by the U.S. government, which could 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;
- changes in accounting policies and practices; and
- other unexpected material adverse changes in our operations or earnings.

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

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

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES:** Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2022 contains a summary of the Company’s significant accounting policies.

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

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

Although Management uses the best information available, the level of the allowance for credit losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for credit losses. Such agencies may require the Company to make additional provisions for credit losses based upon information available to them at the time of their examination. Furthermore, the majority of the Company’s loans are secured by real estate in New Jersey and, to a lesser extent, New York City. Accordingly, the collectability of a substantial portion of the carrying value of the Company’s loan portfolio is susceptible to changes in local market conditions and any adverse economic conditions. Future adjustments to the provision for credit losses and allowance for credit losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control.

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

**EXECUTIVE SUMMARY:** The following table presents certain key aspects of our performance for the three months ended March 31, 2023 and 2022.

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

| Results of Operations: | For the Three Months Ended March 31, 2023 | 2022 | Change 2023 vs 2022 |
| --- | ---: | ---: | ---: |
| Interest income | $70,491 | $44,140 | $26,351 |
| Interest expense | 26,513 | 4,518 | $21,995 |
| Net interest income | 43,978 | 39,622 | 4,356 |
| Provision for credit losses | 1,513 | 2,375 | (862) |
| Net interest income after provision for credit losses | 42,465 | 37,247 | 5,218 |
| Wealth management fee income | 13,762 | 14,834 | (1,072) |
| Other income (A) | 4,297 | (120) | 4,417 |
| Operating expense (B) | 35,574 | 34,169 | 1,405 |
| Income before income tax expense | 24,950 | 17,792 | 7,158 |
| Income tax expense | 6,595 | 4,351 | 2,244 |
| Net income | $18,355 | $13,441 | $4,914 |
| Total revenue (C) | $62,037 | $54,336 | $7,701 |
| Diluted average shares outstanding | 18,263,310 | 18,946,683 | (683,373) |
| Diluted earnings per share | $1.01 | $0.71 | $0.30 |
| Return on average assets annualized ("ROAA") | 1.16% | 0.87% | 0.29% |
| Return on average equity annualized ("ROAE") | 13.50 | 9.88 | 3.62 |

(A) The quarter ended March 31, 2023 and 2022 included a fair value adjustment on a CRA equity security of positive $209,000 and negative $682,000, respectively. The quarter ended March 31, 2022 included a $6.6 million loss on sale of securities.

(B) The quarter ended March 31, 2023 included $300,000 of expense related to accelerated vesting of restricted stock related to one retiring executive and $175,000 of expense associated with three retail branch closures. The quarter ended March 31, 2022 included $1.5 million of severance expense related to certain staff reorganizations.

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

| Selected Balance Sheet Ratios: | March 31, 2023 | December 31, 2022 | Change 2023 vs 2022 |
| --- | ---: | ---: | ---: |
| Total capital (Tier I + II) to risk-weighted assets | 15.15% | 14.73% | 0.42% |
| Tier I leverage ratio | 9.02 | 8.90 | 0.12 |
| Loans to deposits | 101.07 | 101.54 | (0.47) |
| Allowance for credit losses to total loans | 1.16 | 1.15 | 0.01 |
| Allowance for credit losses to nonperforming loans | 217.21 | 320.59 | (103.38) |
| Nonperforming loans to total loans | 0.53 | 0.36 | 0.17 |

For the three months ended March 31, 2023, the Company recorded total revenue of $62.04 million, pretax income of $24.95 million, net income of $18.36 million and diluted earnings per share of $1.01, compared to revenue of $54.34 million, pretax income of $17.79 million, net income of $13.44 million and diluted earnings per share of $0.71 for the same period last year. The first quarter of 2023 included increased net interest income driven by net interest margin expansion, which benefitted by an increase in the target Federal Funds rate of 475 basis points, and loan growth, partially offset by a decline in wealth management income and income from capital markets activities (which includes mortgage banking income, back-to-back swap income, SBA loan income, and corporate advisory fee income), and increased operating expenses. Other income included fair value adjustments on an equity security held for CRA investment purposes, reflecting a gain of $209,000 for the quarter ended March 31, 2023 and a loss of $682,000 for the quarter ended March 31, 2022. The three months ended March 31, 2022 included a $6.6 million loss on sale of securities as a result of the Company's balance sheet repositioning completed in March 2022.

Operating expenses increased primarily due to increased corporate and health insurance costs; hiring in line with the Company’s strategic plan, which included an increase in full time equivalent employees from 478 at March 31, 2022 to 512 at March 31, 2023; normal salary increases, and increased FDIC insurance expense. Additionally, the three months ended March 31, 2023 included operating expenses of $300,000 associated with the acceleration of restricted stock related to one executive retiring, $175,000 of expense associated with three retail branch closures and additional restricted stock expense associated with additional shares being granted to executives due to performance measures exceeding peers. Operating expense for the first quarter of 2022 included $1.5 million of severance expense related to certain staff reorganizations within several areas of the Bank.

**RECENT DEVELOPMENTS:** During the first quarter of 2023, the banking industry experienced volatility with several high-profile bank failures and industry- wide concerns related to liquidity, deposit outflows, unrealized securities losses and eroding consumer confidence in the banking system. Despite these negative industry developments, the Company's liquidity position and balance sheet remain strong as on-balance sheet liquidity (investments available for sale, interest-earning deposits and cash) grew to $851 million as of March 31, 2023 driven by an increase in cash balances of $61 million during the first quarter.

The Company maintains additional liquidity resources of approximately $3.3 billion through secured available funding with the Federal Home Loan Bank ($1.5 billion) and secured funding from the Federal Reserve Discount Window ($1.8 billion). The available funding from the Federal Home Loan Bank and the Federal Reserve are secured by the Company’s loan and investment portfolios. In addition, the Company also has access to the Bank Term Funding Program offered by the Federal Reserve Bank for the next twelve months if needed.

The Company experienced an increase in deposits of $104 million, or 2.0 percent for the quarter ended March 31, 2023. Furthermore, the Company's capital at March 31, 2023 remains above well capitalized levels with common equity tier 1 capital ("CET1") and total risk-based capital ratios of 11.39 percent and 15.15 percent, respectively, for the Company and 13.93 percent and 15.18 percent for the Bank, respectively.

**OFF-BALANCE SHEET ARRANGEMENTS:** For a discussion of our off-balance sheet arrangements, see the information set forth in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Off-Balance Sheet Arrangements and Aggregate Contractual Obligations.”

### EARNINGS ANALYSIS

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

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

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

*(In thousands)*

|  | For the Three Months Ended March 31, 2023 | March 31, 2022 |
| --- | ---: | ---: |
| Residential mortgage loans originated for portfolio | $30,303 | $41,547 |
| Residential mortgage loans originated for sale | 1,477 | 15,669 |
| Total residential mortgage loans | 31,780 | 57,216 |
| Commercial real estate loans | 18,990 | 25,575 |
| Multifamily | 30,150 | 265,650 |
| C&I loans (A) (B) | 207,814 | 143,029 |
| Small business administration | 9,950 | 26,093 |
| Wealth lines of credit (A) | 23,225 | 9,400 |
| Total commercial loans | 290,129 | 469,747 |
| Installment loans | 12,086 | 131 |
| Home equity lines of credit (A) | 2,921 | 1,341 |
| Total loans closed | $336,916 | $528,435 |

46

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

(b) Includes equipment finance leases and loans.

At March 31, 2023, December 31, 2022 and March 31, 2022, the Bank had a concentration in commercial real estate (“CRE”) loans as defined by applicable regulatory guidance as follows:

|  | March 31, 2023 | December 31, 2022 | March 31, 2022 |
| --- | ---: | ---: | ---: |
| Multifamily real estate loans as a percent of total regulatory capital of the Bank | 245% | 251% | 268% |
| Non-owner occupied commercial real estate loans as a percent of total regulatory capital of the Bank | 133 | 141 | 156 |
| Total CRE concentration | 378% | 392% | 424% |

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

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

### Average Balance Sheet

Unaudited

Three Months Ended

*(Dollars in thousands)*

| ASSETS: Interest-earning assets: Investments: | March 31, 2023 Average Balance | Income/ Expense | Annualized Yield | March 31, 2022 Average Balance | Income/ Expense | Annualized Yield |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Taxable (A) | $791,125 | $4,471 | 2.26% | $928,828 | $3,606 | 1.55% |
| Tax-exempt (A) (B) | 1,864 | 19 | 4.08 | 4,701 | 48 | 4.08 |
| Loans (B) (C): |  |  |  |  |  |  |
| Residential mortgages | 529,570 | 4,283 | 3.24 | 508,408 | 3,656 | 2.88 |
| Commercial mortgages | 2,478,645 | 25,917 | 4.18 | 2,353,032 | 18,175 | 3.09 |
| Commercial | 2,201,801 | 33,369 | 6.06 | 2,008,464 | 18,203 | 3.63 |
| Commercial construction | 4,296 | 88 | 8.19 | 18,087 | 160 | 3.54 |
| Installment | 39,945 | 609 | 6.10 | 34,475 | 254 | 2.95 |
| Home equity | 33,839 | 591 | 6.99 | 40,245 | 324 | 3.22 |
| Other | 276 | 7 | 10.14 | 283 | 6 | 8.48 |
| Total loans | 5,288,372 | 64,864 | 4.91 | 4,962,994 | 40,778 | 3.29 |
| Federal funds sold | — | — | — | — | — | — |
| Interest-earning deposits | 163,225 | 1,538 | 3.77 | 127,121 | 29 | 0.09 |
| Total interest-earning assets | 6,244,586 | 70,892 | 4.54% | 6,023,644 | 44,461 | 2.95% |
| Noninterest-earning assets: |  |  |  |  |  |  |
| Cash and due from banks | 10,449 |  |  | 7,455 |  |  |
| Allowance for credit losses | (61,567) |  |  | (61,001) |  |  |
| Premises and equipment | 23,927 |  |  | 23,022 |  |  |
| Other assets | 84,800 |  |  | 168,239 |  |  |
| Total noninterest-earning assets | 57,609 |  |  | 137,715 |  |  |
| Total assets | $6,302,195 |  |  | $6,161,359 |  |  |
| LIABILITIES: |  |  |  |  |  |  |
| Interest-bearing deposits: |  |  |  |  |  |  |
| Checking | $2,567,426 | $16,481 | 2.57% | $2,330,340 | $1,238 | 0.21% |
| Money markets | 1,124,047 | 4,874 | 1.73 | 1,294,100 | 539 | 0.17 |
| Savings | 141,285 | 28 | 0.08 | 156,554 | 5 | 0.01 |
| Certificates of deposit - retail | 357,953 | 1,729 | 1.93 | 426,166 | 606 | 0.57 |
| Subtotal interest-bearing deposits | 4,190,711 | 23,112 | 2.21 | 4,207,160 | 2,388 | 0.23 |
| Interest-bearing demand - brokered | 26,111 | 208 | 3.19 | 85,000 | 373 | 1.76 |
| Certificates of deposit - brokered | 25,961 | 205 | 3.16 | 33,823 | 261 | 3.09 |
| Total interest-bearing deposits | 4,242,783 | 23,525 | 2.22 | 4,325,983 | 3,022 | 0.28 |
| FHLB advances and borrowings | 104,915 | 1,296 | 4.94 | 55,513 | 64 | 0.46 |
| Finance lease liabilities | 4,493 | 53 | 4.72 | 5,662 | 68 | 4.80 |
| Subordinated debt | 133,017 | 1,639 | 4.93 | 132,731 | 1,364 | 4.11 |
| Total interest-bearing liabilities | 4,485,208 | 26,513 | 2.36% | 4,519,889 | 4,518 | 0.40% |
| Noninterest-bearing liabilities: |  |  |  |  |  |  |
| Demand deposits | 1,176,495 |  |  | 978,288 |  |  |
| Accrued expenses and other liabilities | 96,631 |  |  | 119,003 |  |  |
| Total noninterest-bearing liabilities | 1,273,126 |  |  | 1,097,291 |  |  |
| Shareholders’ equity | 543,861 |  |  | 544,179 |  |  |
| Total liabilities and shareholders’ equity | $6,302,195 |  |  | $6,161,359 |  |  |
| Net interest income (tax-equivalent basis) |  | $44,379 |  |  | $39,943 |  |
| Net interest spread |  |  | 2.18% |  |  | 2.55% |
| Net interest margin (D) |  |  | 2.88% |  |  | 2.69% |
| Tax equivalent adjustment |  | $(401) |  |  | $(321) |  |
| Net interest income |  | $43,978 |  |  | $39,622 |  |

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

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

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

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

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

| (In Thousands): ASSETS: | For the Three Months Ended March 31, 2023 Difference due to Change In: Volume | Rate | Change In Income/ Expense |
| --- | ---: | ---: | ---: |
| Investments | $(550) | $1,386 | $836 |
| Loans | 3,031 | 21,055 | 24,086 |
| Interest-earning deposits | 10 | 1,499 | 1,509 |
| Total interest income | $2,491 | $23,940 | $26,431 |
| **LIABILITIES:** |  |  |  |
| Interest-bearing checking | $(136) | $15,379 | $15,243 |
| Money market | (14) | 4,349 | 4,335 |
| Savings | (3) | 26 | 23 |
| Certificates of deposit - retail | (111) | 1,234 | 1,123 |
| Certificates of deposit - brokered | (62) | 6 | (56) |
| Interest bearing demand brokered | (469) | 304 | (165) |
| Borrowed funds | 651 | 581 | 1,232 |
| Capital lease obligation | (15) | — | (15) |
| Subordinated debt | 3 | 272 | 275 |
| Total interest expense | $(156) | $22,151 | $21,995 |
| Net interest income | $2,647 | $1,789 | $4,436 |

Net interest income, on a fully tax-equivalent basis, grew $4.4 million, or 11 percent, for the first quarter of 2023 to $44.4 million from $39.9 million in the same 2022 period. The net interest margin ("NIM") was 2.88 percent and 2.69 percent for the three months ended March 31, 2023 and 2022, respectively, an increase of 19 basis points quarter over quarter. The growth in net interest income and NIM for the quarter ended March 31, 2023, when compared to 2022 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 the average balance of interest-earning assets, offset by an increase in the cost of interest-bearing liabilities of 196 basis points.

During the first quarter of 2022, the Company executed a balance sheet reposition to benefit future NIM, in which $250.0 million of multifamily loans were purchased, 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 earn-back period of less than three years 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 the average balance of interest-earning assets was driven by growth of $325.4 million in loans to $5.29 billion for the first quarter of 2023 from $4.96 billion in the same 2022 period, partially offset by a decrease in investments of $140.5 million as part of the balance sheet reposition strategy described above.

When comparing the first quarter of 2023 to the same period of 2022, the growth in loans was driven by growth in commercial loans of $193.3 million or 10 percent, for the quarter ended March 31, 2023 to $2.20 billion from $2.01 billion for the quarter ended March 31, 2022. Additionally commercial mortgages grew $125.6 million, or 5 percent, to $2.48 billion for the quarter ended March 31, 2023 from $2.35 billion for the same 2022 period as part of the Company's balance sheet reposition strategy described above.

The average balance of investments decreased $140.5 million to $793.0 million for the quarter ended March 31, 2023 compared to $933.5 million from the same 2022 period. The decrease was primarily a result of the balance sheet reposition strategy executed in the first quarter of 2022 described above.

For the quarter ended March 31, 2023 and 2022 periods, the average yields earned on interest-earning assets were 4.54 percent and 2.95 percent, respectively, an increase of 159 basis points. The increase in yields on interest-earning assets was primarily due to the increase in the target Federal Funds rate of 475 basis points. This resulted in increases on the yield on loans of 162 basis points to 4.91 percent, the yield on interest-earning deposits of 368 basis points to 3.77 percent and the yield on investments of 69 basis points to 2.26 percent, when comparing the three months ended March 31, 2023 to the same 2022 period.

The average yield on total loans increased 162 basis points to 4.91 percent for quarter ended March 31, 2023 when compared to 3.29 percent for the same 2022 period. This increase was driven by an increase in the yield on commercial loans of 243 basis points to 6.06 percent for 2023, due to an increase in target Federal Funds rate of 475 basis points since rates started increasing given these loans are typically floating rates with short repricing periods. The yield on commercial mortgages was 4.18 percent, which reflected an increase of 109 basis points when comparing the first quarter of 2023 to the same 2022 period, which is primarily driven by the originations of loans with higher yields in the higher interest rate environment. In addition, 21 percent of our loans reprice within one month; 34 percent within three months and 45 percent within one year.

During the first quarter of 2023 and 2022, the Company recorded a yield on investments of 2.26 percent and 1.57 percent, respectively. The increase in yield was due to the Company purchasing higher-yielding investments during 2022 and during the first quarter of 2023.

For the quarter ended March 31, 2023, the average balance of interest-bearing liabilities totaled $4.49 billion representing a decrease of $34.7 million or 1 percent from $4.52 billion for the same 2022 period. The decrease in interest-bearing liabilities reflected a decline of interest-bearing deposits of $83.2 million to $4.24 billion for the three months ended March 31, 2023 from $4.33 billion during the same 2022 period; offset by increases in the average balance of borrowings of $49.4 million from $55.5 million in the first quarter of 2022 to $104.9 million in the same 2023 period.

The decrease in the average balance of interest-bearing deposits was primarily due to a decline in the average balance of brokered deposits of $66.8 million to $52.1 million for the first quarter of 2023 when compared to the first quarter of 2022. The Company actively tries to reduce our reliance on brokered deposits. Additionally, interest-bearing deposits were affected by a decline in the average balance of money market deposits of $170.1 million. The decline in money market and brokered deposits was partially offset by an increase in the average balance of interest-bearing checking accounts of $237.1 million during the first quarter of 2023. The increase in interest-bearing checking was partially due to maturing CDS that shifted into these accounts combined with stronger consumer demand for higher-yielding accounts.

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 $628.3 million and $713.8 million for three months ended March 31, 2023 and 2022, respectively.

At March 31, 2023, uninsured deposits were approximately $1.6 billion, or 30 percent of total deposits. This amount was adjusted to exclude $296 million of public fund deposit balances, which are fully-collateralized and protected.

There was an increase in the average balance of borrowings to $104.9 million for the quarter ended March 31, 2023 from $55.5 million for the quarter ended March 31, 2022. The increase in borrowings of $49.4 million was principally due to the Company initiating a short-term borrowing position in response to the March 2023 financial service industry headwinds.

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. The December 2020 issuance has re-priced to 7.31 percent commencing in December 2022 through March 2023. In December 2017, the Company issued $35.0 million of subordinated debt ($34.1 million net of issuance costs) bearing interest at an annual rate of 4.75 percent for the first five years, and thereafter at an adjustable rate until maturity in December 2027 or earlier redemption.

For the quarters ended March 31, 2023 and 2022, the cost of interest-bearing liabilities was 2.36 percent and 0.40 percent, respectively, reflecting an increase of 196 basis points. The increase was driven by an increase in the average cost of interest-bearing deposits of 194 basis points to 2.22 percent for the first quarter of 2023 when compared to the same 2022 period. The Federal Reserve raised target Federal Funds rate 475 basis points, which has caused competitive pressure on deposit rates. Additionally, the cost of borrowings increased 448 basis points to 4.94 percent for the three months ended March 31, 2023 when compared to the first quarter of 2022.

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

At March 31, 2023, the Company had investment securities available for sale with a fair value of $556.3 million compared with $554.6 million at December 31, 2022. A net unrealized loss (net of income tax) of $72.3 million and of $81.0 million were included in shareholders’ equity at March 31, 2023 and December 31, 2022, respectively.

At March 31, 2023, the Company had investment securities held to maturity with a carrying cost of $111.6 million and an estimated fair value of $98.0 million compared with a carrying cost of $102.3 million and an estimated fair value of $87.2 million at December 31, 2022.

The Company has one equity security (a CRA investment security) with a fair value of $13.2 million at March 31, 2023 compared with a fair value of $13.0 million at December 31, 2022, with changes in fair value recognized in the Consolidated Statements of Income. The Company recorded an unrealized gain of $209,000 for the three months ended March 31, 2023, as compared to an unrealized loss of $682,000 for the same period in 2022.

The carrying value of investment securities available for sale as of March 31, 2023 and December 31, 2022 are shown below:

*(In thousands)*

| Investment securities - available for sale: | March 31, 2023 Amortized Cost | Estimated Fair Value | December 31, 2022 Amortized Cost | Estimated Fair Value |
| --- | ---: | ---: | ---: | ---: |
| U.S. government-sponsored agencies | $244,779 | $194,787 | $244,774 | $190,542 |
| Mortgage-backed securities-residential (principally U.S. government-sponsored entities) | 366,852 | 324,187 | 372,471 | 325,738 |
| SBA pool securities | 30,403 | 26,452 | 31,934 | 27,427 |
| State and political subdivisions | 1,860 | 1,852 | 1,866 | 1,849 |
| Corporate bond | 10,000 | 8,988 | 10,000 | 9,092 |
| Total investment securities - available for sale | $653,894 | $556,266 | $661,045 | $554,648 |
| Investment securities - held to maturity: |  |  |  |  |
| U.S. government-sponsored agencies | 40,000 | 35,999 | 40,000 | 35,437 |
| Mortgage-backed securities-residential (principally U.S. government-sponsored entities) | 71,609 | 61,968 | 62,291 | 51,750 |
| Total investment securities - held to maturity | $111,609 | $97,967 | $102,291 | $87,187 |
| Total | $765,503 | $654,233 | $763,336 | $641,835 |

51

The following table presents the contractual maturities and yields of debt securities available for sale and held to maturity as of March 31, 2023. The weighted average yield is a computation of income within each maturity range based on the amortized cost of securities:

|  |  | After 1 But | After 5 But | After |  |
| --- | ---: | ---: | ---: | ---: | ---: |
|  | **Within** | **Within** | **Within** | **10** |  |
| **(Dollars in thousands)** | **1 Year** | **5 Years** | **10 Years** | **Years** | **Total** |
| Investment securities - available for sale: |  |  |  |  |  |
| U.S. government-sponsored agencies | $— | $— | $115,459 | $79,328 | $194,787 |
|  | — | — | 1.39% | 1.79% | 1.56% |
| Mortgage-backed securities-residential (A) | 50,183 | 8,775 | 19,214 | 246,015 | 324,187 |
|  | 5.49% | 2.83% | 1.91% | 2.45% | 2.84% |
| SBA pool securities | — | — | 10,383 | 16,069 | 26,452 |
|  | — | — | 1.90% | 1.40% | 1.59% |
| State and political subdivisions (B) | 1,852 | — | — | — | 1,852 |
|  | 2.19% | — | — | — | 2.19% |
| Corporate bond | — | — | 8,988 | — | 8,988 |
|  | — | — | 4.81% | — | 4.81% |
| Total investments - available for sale | $52,035 | $8,775 | $154,044 | $341,412 | $556,266 |
|  | 5.37% | 2.83% | 1.67% | 2.23% | 2.33% |
| 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-residential (A) | — | — | — | 71,609 | 71,609 |
|  | — | — | — | 2.25% | 2.25% |
| Total investments - held to maturity | $— | $30,000 | $10,000 | $71,609 | 111,609 |
|  | — | 1.47% | 1.74% | 2.25% | 2.00% |
| Total | $52,035 | $38,775 | $164,044 | $413,021 | $667,875 |
|  | 5.37% | 1.78% | 1.68% | 2.23% | 2.28% |

(A) Shown using stated final maturity.

(B) Yields presented on a fully tax-equivalent basis using a 21 percent federal tax rate.

Federal funds sold and interest-earning deposits are an additional part of the Company’s liquidity and interest rate risk management strategies. The combined average balance of these investments during the three months ended March 31, 2023 was $163.2 million compared to $127.1 million for the quarter ended March 31, 2022.

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

*(In thousands)*

|  | For the Three Months Ended March 31, 2023 | 2022 | Change 2023 vs 2022 |
| --- | ---: | ---: | ---: |
| Service charges and fees | $1,258 | $952 | $306 |
| Bank owned life insurance | 297 | 313 | (16) |
| Gain on sale of loans (mortgage banking) | 21 | 247 | (226) |
| Gain on sale of SBA loans | 865 | 2,844 | (1,979) |
| Corporate advisory fee income | 80 | 1,561 | (1,481) |
| Other income | 1,567 | 1,254 | 313 |
| Loss on securities sale, net | — | (6,609) | 6,609 |
| Fair value adjustment for CRA equity security | 209 | (682) | 891 |
| Total other income (excluding wealth management income) | $4,297 | $(120) | $4,417 |

The Company recorded total other income, excluding wealth management fee income, of $4.3 million for the first quarter of 2023 compared to $6.5 million for the same quarter of 2022 (when excluding the $6.6 million loss on sale of securities executed in the three months ended March 31, 2022), reflecting a decrease of $2.2 million.

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 that could be used for start-up businesses. All SBA loans are underwritten and documented as prescribed by the SBA. The Company generally sells the guaranteed portion of the SBA loans in the secondary market, with the non-guaranteed portion of SBA loans held in the loan portfolio. The first quarter of 2023 included $865,000 of gains on sales of SBA loans, which represents a decrease of $2.0 million, or 70 percent, compared to $2.8 million for the same quarter in 2022. The first quarter of 2023 has been impacted by both market volatility and the higher interest rate environment resulting in lower sale premiums and origination volumes.

The Company recorded corporate advisory fee income for the first quarter of 2023 of $80,000 compared to $1.6 million for the same three-month period ended March 31, 2022. The first quarter of 2022 included $1.5 million related to one major corporate advisory/investment banking acquisition transaction.

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

For the three months ended March 31, 2023, income from the sale of newly originated residential mortgage loans was $21,000 compared to $247,000 for the same quarter in 2022. The decrease for the three months ended March 31, 2023, was the result of the lower volume of residential mortgage loans originated for sale due to a slowdown in refinancing and home purchase activity in the higher interest rate environment.

Other income for the quarter ended March 31, 2023 and 2022 included unused commercial line fees of $852,000 and $122,000, respectively. Additionally, the Company recorded income by the Equipment Finance Division related to equipment transfers to lessees of $145,000 and $426,000, respectively, for the three months ended March 31, 2023 and 2022.

During the first quarter of 2023, the Company recorded a $209,000 gain on the fair value adjustment for CRA equity securities compared to a loss of $682,000 for the same 2022 period.

Other income for the three months ended March 31, 2022, included a $6.6 million loss on securities due to the Company’s balance sheet repositioning, by selling lower-yielding securities and replacing them with higher-yielding like duration multifamily loans. The Company's repositioning has improved the NIM with no impact to tangible capital or tangible book value per share.

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

*(In thousands)*

|  | For the Three Months Ended March 31, 2023 | 2022 | Change 2023 vs 2022 |
| --- | ---: | ---: | ---: |
| Compensation and employee benefits | $24,586 | $22,449 | $2,137 |
| Premises and equipment | 4,374 | 4,647 | (273) |
| FDIC assessment | 711 | 471 | 240 |
| Other Operating Expenses: |  |  |  |
| Professional and legal fees | 1,345 | 1,138 | 207 |
| Telephone | 369 | 334 | 35 |
| Advertising | 396 | 290 | 106 |
| Amortization of intangible assets | 354 | 431 | (77) |
| Swap valuation allowance | — | 673 | (673) |
| Branch/office restructure | 175 | 372 | (197) |
| Other | 3,264 | 3,364 | (100) |
| Total operating expenses | $35,574 | $34,169 | $1,405 |

Operating expenses totaled $35.6 million for the three months ended March 31, 2023, compared to $34.2 million for the same 2022 period, reflecting an increase of $1.4 million, or 4 percent. The increased operating expenses for the three months ended March 31, 2023 were principally attributable to: increased corporate and health insurance costs; hiring in line with the Company’s strategic plan, which included an increase in full-time equivalent employees from 478 at March 31, 2022 to 512 at March 31, 2023; normal salary increases, and increased FDIC assessment expense. The three months ended March 31, 2023 included $175,000 of expenses associated with the closure of three retail branch locations compared to $372,000 of expenses associated with the consolidation of private banking offices in the same quarter of 2022. The quarter ended March 31, 2023 included increased restricted stock expense associated with additional shares being granted to executives due to performance measures exceeding peers, as well as $300,000 of expense related to restricted stock expense associated with a retiring executive. The quarter ended March 31, 2022 included $1.5 million of severance expense related to certain staff reorganizations within several areas of the Bank and $673,000 of expense attributable to a swap valuation allowance.

**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 and 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 market value of the assets under management and/or administration (“AUM/AUA”) of Peapack Private was $10.4 billion at March 31, 2023, reflecting a 5 percent increase from $9.9 billion at December 31, 2022 and a decrease of 3 percent from $10.7 billion at March 31, 2022. The equity market generally improved during Q1 2023, growing 7 percent, but is still down almost 10 percent compared to a year ago.

In the March 2023 quarter, Peapack Private generated $13.8 million in fee income compared to $14.8 million for the March 2022 quarter, reflecting a 7 percent decrease. The decrease in fee income for the three months ended March 31, 2023 was largely due to the equity and bond market decline in 2022.

Operating expenses relative to Peapack Private reflected increases due to overall growth in the business and new hires when comparing the three months ended March 31, 2023 to the same period for 2022. Expenses are in line with the Company’s Strategic Plan, particularly the hiring of key management and revenue-producing personnel.

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

**NONPERFORMING ASSETS:** OREO, loans past due in excess of 90 days and still accruing, and nonaccrual loans are considered nonperforming assets.

The following table sets forth asset quality data as of the dates indicated:

*(Dollars in thousands)*

|  | As of March 31, 2023 | December 31, 2022 | September 30, 2022 | June 30, 2022 | March 31, 2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Loans past due 90 days or more and still accruing | $— | $— | $— | $— | $— |
| Nonaccrual loans | 28,659 | 18,974 | 15,724 | 15,078 | 15,884 |
| Other real estate owned | 116 | 116 | 116 | 116 | — |
| Total nonperforming assets | $28,775 | $19,090 | $15,840 | $15,194 | $15,884 |
| Performing modifications (A) | $248 | $— | $— | $— | $— |
| Performing TDRs (B)(C) | $— | $965 | $2,761 | $2,272 | $2,375 |
| Loans past due 30 through 89 days and still accruing (D) | $2,762 | $7,592 | $7,248 | $3,126 | $606 |
| Loans subject to special mention | $46,566 | $64,842 | $82,107 | $98,787 | $110,252 |
| Classified loans | $58,010 | $42,985 | $27,507 | $27,167 | $47,386 |
| Individually evaluated loans | $27,736 | $16,732 | $13,047 | $13,227 | $16,147 |
| Nonperforming loans as a % of total loans (E) | 0.53% | 0.36% | 0.30% | 0.29% | 0.31% |
| Nonperforming assets as a % of total assets (E) | 0.44% | 0.30% | 0.26% | 0.25% | 0.25% |
| Nonperforming assets as a % of total loans plus other real estate owned (E) | 0.54% | 0.36% | 0.31% | 0.29% | 0.31% |

(A) Amounts reflect modifications that are paying according to modified terms.

(B) Amounts reflect TDRs that are paying according to restructured terms. On January 1, 2023, the Company adopted Accounting Standards Update 2022-02, which replaced the accounting and recognition of TDRs.

(C) Amount excludes $13.4 million at December 31, 2022, $12.9 million at September 30, 2022, $13.5 million at June 30, 2022 and $13.6 million at March 31, 2022 of TDRs included in nonaccrual loans.

(D) Includes $4.5 million outstanding to U.S. governmental entities at December 31, 2022.

(E) Nonperforming loans/assets do not include performing TDRs or modifications.

**PROVISION FOR CREDIT LOSSES**: The provision for credit losses was $1.5 million and $2.4 million for the first quarters of 2023 and 2022, respectively. The decreased provision for credit losses for the three months ended March 31, 2023, when compared to the three months ended March 31, 2022, was due principally to weaker loan growth in the first quarter of 2023.

The allowance for credit losses was $62.3 million as of March 31, 2023, compared to $60.8 million at December 31, 2022. The increase in the allowance for credit losses (“ACL”) was primarily due to the provision for credit losses of $1.5 million. The allowance for credit losses as a percentage of loans was 1.16 percent and 1.15 percent at March 31, 2023 and December 31, 2022, respectively. The specific reserves recorded on individually evaluated loans were $2.6 million at March 31, 2023 compared to $1.5 million as of December 31, 2022. Total individually evaluated loans were $27.7 million and $16.7 million as of March 31, 2023 and December 31, 2022, respectively. The increase in specific reserves and balance of individually evaluated loans was primarily due to one multifamily relationship of $9.7 million that transferred to nonaccrual status during the first quarter of 2023. The general component of the allowance increased from $59.3 million at December 31, 2022 to $59.6 million at March 31, 2023.

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

The adoption of CECL resulted in a day one reduction of $5.5 million on January 1, 2022. The lower allowance was in part attributed to historically low charge-offs combined with the shorter duration of the loan portfolio employed in our CECL analysis. Further, the incurred loss method required significant qualitative factors, including factors related to COVID-19, and the use of a multiplier for potential losses on criticized and classified loans, neither of which are included within the CECL methodology. The CECL methodology utilizes significantly less qualitative factors as it uses economic factors and historical losses over a full economic cycle and calculates losses based on DCF on an individual loan basis. Accordingly, the CECL model quantitatively accounts for some of the qualitative factors utilized in the incurred loss methodology.

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

*(Dollars in thousands)*

| Allowance for credit losses: | March 31, 2023 | December 31, 2022 | September 30, 2022 | June 30, 2022 | March 31, 2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Beginning of period | $60,829 | $59,683 | $59,022 | $58,386 | $61,697 |
| Day one CECL adjustment | — | — | — | — | (5,536) |
| Provision for credit losses (A) | 1,464 | 2,103 | 665 | 646 | 2,489 |
| (Charge-offs)/recoveries, net | (43) | (957) | (4) | (10) | (264) |
| End of period | $62,250 | $60,829 | $59,683 | $59,022 | $58,386 |
| Allowance for credit losses as a % of total loans | 1.16% | 1.15% | 1.15% | 1.14% | 1.13% |
| General allowance for credit losses as a % of total loans | 1.11% | 1.12% | 1.10% | 1.09% | 1.09% |
| Allowance for credit losses as a % of non-performing loans | 217.21% | 320.59% | 379.57% | 391.44% | 367.58% |

55

(A) Commencing on January 1, 2022, the allowance calculation is based on the CECL methodology. Provision to rollforward the ACL excludes a provision of $49,000 for the three months ended March 31, 2023, a credit of $173,000 for the three months ended December 31, 2022, a credit of $66,000 for the three months ended September 30, 2022, a provision of $803,000 for the three months ended June 30, 2022 and a credit of $114,000 for the three months ended March 31, 2022 related to the off-balance sheet commitments.

**INCOME TAXES:** Income tax expense for the quarter ended March 31, 2023 was $6.6 million as compared to $4.4 million for the same period in 2022.

The effective tax rate for the three months ended March 31, 2023 was 26.43 percent compared to 24.45 percent for the same quarter in 2022. The March 31, 2023 and 2022 quarters both benefitted from the vesting of restricted stock at prices higher than grant prices. The March 2023 quarter when compared to the same 2022 quarter included additional expense associated with recent legislation that changed the nexus standard for 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.

Capital was benefitted by net income of $18.4 million for the three months ended March 31, 2023 and a net gain in accumulated other comprehensive income of $6.8 million ($8.7 million gain related to the available for sale portfolio partially offset by a $1.9 million loss on cash flow hedges), which was partially offset by the purchase of shares through the Company’s stock repurchase program. The Company repurchased 83,014 shares, at an average price of $34.35, for a total cost of $2.9 million during the three months ended March 31, 2023.

The Company employs quarterly capital stress testing - adverse case and severely adverse case. In the most recent completed stress test based on December 31, 2022 financial information, under the severely adverse case, and no growth scenarios, the Bank remains well capitalized over a two-year stress period. With a pandemic stress overlay, the Bank still remains well capitalized over the two-year stress period.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Total, Common Equity Tier 1 and Tier 1 capital (each as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). At March 31, 2023 and December 31, 2022, all of the Bank’s capital ratios remain above the levels required to be considered “well capitalized” and the Company’s capital ratios remain above regulatory requirements.

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

As a result of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies were required to develop a “Community Bank Leverage Ratio” ("CBLR") (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 CBLR 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 11.03 percent at March 31, 2023.

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

*(Dollars in thousands)*

| As of March 31, 2023: | Actual Amount | Ratio | To Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio | For Capital Adequacy Purposes Amount | Ratio | For Capital Adequacy Purposes Including Capital Conservation Buffer (A) Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Total capital (to risk-weighted assets) | $763,732 | 15.18% | $502,971 | 10.00% | $402,377 | 8.00% | $528,119 | 10.50% |
| Tier I capital (to risk-weighted assets) | 700,858 | 13.93 | 402,377 | 8.00 | 301,782 | 6.00 | 427,525 | 8.50 |
| Common equity tier I (to risk-weighted assets) | 700,840 | 13.93 | 326,931 | 6.50 | 226,337 | 4.50 | 352,079 | 7.00 |
| Tier I capital (to average assets) | 700,858 | 11.03 | 317,818 | 5.00 | 254,254 | 4.00 | 254,254 | 4.00 |
| As of December 31, 2022: |  |  |  |  |  |  |  |  |
| Total capital (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 |

(A) See footnote on following table

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

*(Dollars in thousands)*

| As of March 31, 2022: | Actual Amount | Ratio | To Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio | For Capital Adequacy Purposes Amount | Ratio | For Capital Adequacy Purposes Including Capital Conservation Buffer (A) Amount | Ratio |
| --- | ---: | ---: | --- | --- | ---: | ---: | ---: | ---: |
| Total capital (to risk-weighted assets) | $762,095 | 15.15% | N/A | N/A | $402,427 | 8.00% | $528,186 | 10.50% |
| Tier I capital (to risk-weighted assets) | 573,154 | 11.39 | N/A | N/A | 301,820 | 6.00 | 427,579 | 8.50 |
| Common equity tier I (to risk-weighted assets) | 573,136 | 11.39 | N/A | N/A | 226,365 | 4.50 | 352,124 | 7.00 |
| Tier I capital (to average assets) | 573,154 | 9.02 | N/A | N/A | 254,264 | 4.00 | 254,264 | 4.00 |
| As of December 31, 2022: |  |  |  |  |  |  |  |  |
| Total capital (to risk-weighted assets) | $754,197 | 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 |

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

The Dividend Reinvestment Plan of Peapack-Gladstone Financial Corporation, or the “Reinvestment Plan,” allows shareholders of the Company to purchase additional shares of common stock using cash dividends without payment of any brokerage commissions or other charges. Shareholders may also make voluntary cash payments of up to $200,000 per quarter to purchase additional shares of common stock. Voluntary share purchases in the “Reinvestment Plan” can be filled from the Company’s authorized but unissued shares and/or in the open market, at the discretion of the Company. All shares purchased during the quarter ended March 31, 2023 were purchased in the open market.

On April 24, 2023, the Board of Directors declared a regular cash dividend of $0.05 per share payable on May 22, 2023 to shareholders of record on May 8, 2023.

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. During the first quarter of 2023, the Company experienced positive trends in its liquidity position. Cash and cash equivalents increased by $61.2 million. Deposit balances grew by $103.6 million, or 8 percent on an annualized basis. The ratio of cash and cash equivalents and available for sale securities to total assets increased to 13.13 percent. Cash and cash equivalents, including interest-earning deposits, totaled $251.3 million at March 31, 2023. In addition, the Company had $556.3 million in securities designated as available for sale at March 31, 2023. 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 $454.9 million and $101.3 million as of March 31, 2023, respectively, were pledged to secure public funds and for other purposes required or permitted by law. In addition, the Company generates significant liquidity from scheduled and unscheduled principal repayments of loans and mortgage-backed securities.

As of March 31, 2023, the Company had approximately $1.5 billion of secured funding available from the Federal Home Loan Bank. Additionally, the Company 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 were $10.0 million at March 31, 2023. The interest rate paid on these deposits allows the Bank to fund asset growth at attractive rates and engage in interest rate swaps to hedge its asset-liability interest rate risk. The Company ensures ample available collateralized liquidity as a backup to these short-term brokered deposits. As of March 31, 2023, the Company had transacted pay fixed, receive floating interest rate swaps totaling $310.0 million in notional amount, which includes $100.0 million of forward-starting swaps.

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

Management believes the Company’s liquidity position and sources were adequate at March 31, 2023.

## Market risk

As filed, 7,490 characters.

**ASSET/LIABILITY MANAGEMENT**: The Company’s Asset/Liability Committee (“ALCO”) is responsible for developing, implementing and monitoring asset/liability management strategies and advising the Board of Directors on such strategies, as well as the related level of interest rate risk. In this regard, interest rate risk simulation models are prepared on a quarterly basis. These models demonstrate balance sheet gaps and predict changes to net interest income and economic/market value of portfolio equity under various interest rate scenarios. In addition, these models, as well as ALCO processes and reporting, are subject to annual independent third-party review.

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 $310.0 million as of March 31, 2023. 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 two to 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 March 31, 2023, $607.4 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 March 31, 2023. 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 March 31, 2023.

In an immediate and sustained 100 basis point increase in market rates at March 31, 2023, net interest income would increase approximately 0.1 percent for year 1 and 3.2 percent for year 2, compared to a flat interest rate scenario. In an immediate and sustained 100 basis point decrease in market rates at March 31, 2023, net interest income would decrease approximately 0.9 percent for year 1 and 4.1 percent for year 2, compared to a flat interest rate scenario.

In an immediate and sustained 200 basis point increase in market rates at March 31, 2023, net interest income for year 1 would increase approximately 0.9 percent, when compared to a flat interest rate scenario. In year 2 net interest income would increase 6.5 percent, when compared to a flat interest rate scenario.

In an immediate and sustained 200 basis point decrease in market rates at March 31, 2023, net interest income for year 1 would decrease approximately 3.2 percent, when compared to a flat interest rate scenario. In year 2 net interest income would decrease 9.9 percent, when compared to a flat interest rate scenario.

The Company's interest rate sensitivity models indicate the Company is asset sensitive as of March 31, 2023 and that net interest income would improve in a rising rate environment, but decline in a falling rate environment.

The table below shows the estimated changes in the Company’s economic value of portfolio equity (“EVPE”) that would result from an immediate parallel change in the market interest rates at March 31, 2023.

*(Dollars in thousands)*

| Change In Interest Rates (Basis Points) | Estimated Increase/ Decrease in EVPE Estimated EVPE (A) | Amount | Percent | EVPE as a Percentage of Present Value of Assets (B) EVPE Ratio (C) | Increase/(Decrease) (basis points) |
| --- | ---: | ---: | ---: | ---: | ---: |
| +200 | $691,976 | $(71,042) | (9.31)% | 11.54% | (61) |
| +100 | 725,994 | (37,024) | (4.85) | 11.84 | (31) |
| Flat interest rates | 763,018 | — | — | 12.15 | — |
| -100 | 820,966 | 57,948 | 7.59 | 12.72 | 57 |
| -200 | 823,551 | 60,533 | 7.93 | 12.52 | 37 |

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

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

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

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

## Controls and procedures

As filed, 3,134 characters.

### Evaluation of Disclosure Controls and Procedures

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

The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

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. 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.

### 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 March 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 3,718 characters.

Other than described below, there have been no material changes in risk factors applicable to the Company from those disclosed in “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

***Recent bank industry events involving financial institution failures may adversely affect our business and the market price of our common stock.***

Recent developments and events in the financial services industry, including the failures of Silicon Valley Bank, Signature Bank and First Republic Bank and the voluntary liquidation of Silvergate Bank, have resulted in decreased confidence in banks among depositors, other counterparties and investors, as well as significant disruption, volatility and reduced valuations of equity and other securities of banks in the capital markets. These events have occurred against the backdrop of a rapidly rising interest rate environment which, among other things, has resulted in unrealized losses in longer duration securities and loans held by banks, more competition for bank deposits and may increase the risk of a potential recession. These events and developments could materially and adversely impact our business or financial condition, including through potential liquidity pressures, reduced net interest margins, and potential increased credit losses. These recent events and developments have, and could continue to, adversely impact the market price and volatility of our common stock. These recent events may also result in changes to laws or regulations governing banks and bank holding companies or result in the impositions of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on our businesses. The cost of resolving the recent failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments.

***Lawmakers’ failure to address the federal debt ceiling in a timely manner, downgrades of the U.S. credit rating and uncertain credit and financial market conditions may affect the stability of securities issued or guaranteed by the federal government, which may affect the valuation or liquidity of our investment securities portfolio and increase future borrowing costs.***

As a result of uncertain political, credit and financial market conditions, including the potential consequences of the federal government defaulting on its obligations for a period of time due to federal debt ceiling limitations or other unresolved political issues, investments in financial instruments issued or guaranteed by the federal government pose credit default and liquidity risks. Given that future deterioration in the U.S. credit and financial markets is a possibility, no assurance can be made that losses or significant deterioration in the fair value of our U.S. government issued or guaranteed investments will not occur. At March 31, 2023, we had approximately $230.8 million and $386.1 million invested in U.S. government agency securities and residential mortgage-backed securities issued or guaranteed by government-sponsored enterprises, respectively, and no investments in U.S. treasury securities. Downgrades to the U.S. credit rating could affect the stability of securities issued or guaranteed by the federal government and the valuation or liquidity of our portfolio of such investment securities, and could result in our counterparties requiring additional collateral for our borrowings. Further, unless and until U.S. political, credit and financial market conditions have been sufficiently resolved or stabilized, it may increase our future borrowing costs.

Filed May 9, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-019455. Last ingested by Listed: Oct 27, 2026, 16:40 ET. No prices; not investment advice.