Peapack Gladstone Financial Corp: Form 10-Q for the period ended Sep 30, 2023

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 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;
• 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;
• a potential government shutdown;
• 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, including our expansion into New York City;
• a reduction in our lower-cost funding sources;
• changes in liquidity, including the size and composition of our deposit portfolio and 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;
• changes in accounting policies and practices; and/or
• 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 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 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 for equity securities are marked to market through the income statement.

EXECUTIVE SUMMARY: The following table presents certain key aspects of our performance for the three months ended September 30, 2023 and 2022.

(Dollars in thousands, except per share data)

(A) Other income for the September 30, 2023 quarter included fee income from equipment finance activity of $2.3 million. The quarters ended September 30, 2023 and 2022 included a fair value adjustment on a CRA equity security of negative $404,000 and negative $571,000, respectively.

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

The following table presents certain key aspects of our performance for the nine months ended September 30, 2023 and 2022.

(Dollars in thousands, except per share data)

(A) Other income for the nine months ended September 30, 2023 included fee income from equipment finance activity of $2.7 million and a fair value adjustment on a CRA equity security of negative $404,000. Other income for the nine months ended September 30, 2022 included a $6.6 million loss on sale of securities and a fair value adjustment on a CRA equity security of negative $1.7 million.

(B) The nine months ended September 30, 2023 included one-time charges of $2.0 million related to the recent retirement of certain employees and $175,000 of expense associated with three retail branch closures. The nine months ended September 30, 2022 included $1.5 million of severance expense related to certain staff reorganization.

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

For the quarter ended September 30, 2023, the Company recorded total revenue of $55.9 million, pretax income of $12.6 million, net income of $8.8 million and diluted earnings per share of $0.49, compared to revenue of $61.9 million, pretax income of $27.7 million, net income of $20.1 million and diluted earnings per share of $1.09 for the same period last year.

For the nine months ended September 30, 2023, the Company recorded total revenue of $175.4 million, pretax income of $55.7 million, net income of $40.3 million and diluted earnings per share of $2.23, compared to revenue of $177.6 million, pretax income of $72.8 million, net income of $53.7 million and diluted earnings per share of $2.88 for the same period last year.

The Company experienced a decline in net interest income during the three and nine months ended September 30, 2023 due to net interest margin contraction as a result of higher deposit rates during 2023. Net interest income declined by $9.0 million to $36.5 million for the quarter ended September 30, 2023 which included an increase in interest expense of $32.5 million offset by an increase in interest income of $23.5 million. The nine months ended September 30, 2023 included a decline of net interest income of $8.6 million which included an increase of interest expense of $84.8 million to $104.4 million when compared to $19.6 million for the same period in 2022. Cycle to date betas are approximately 44 percent during which time the Target Federal Funds rate increased by 525 basis points. Additionally, the decrease in income from capital markets activities (which includes mortgage banking income, back-to-back swap income, SBA loan income, and corporate advisory fee income), and higher operating expenses contributed to the decline in net income for the three and nine months ended September 30, 2023.

Operating expenses for the three and nine months ended September 30, 2023 compared to their respective prior periods 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 476 at September 30, 2022 to 515 at September 30, 2023; normal salary increases, and increased FDIC insurance expense. The three and nine months ended September 30, 2023 included expenses associated with the previously announced expansion into New York City. The nine months ended September 30, 2023 also included one-time charges of $2.0 million associated with the retirement of certain employees, $175,000 of expenses associated with the closure of three retail branch locations, and restricted stock expense of $409,000 associated with additional shares being granted to executives due to performance measures exceeding peers. The nine months ended September 30, 2022 included expenses totaling $372,000 associated with the consolidation of private banking offices, $1.5 million of severance expense related to staff reorganizations within several areas of the Bank and $673,000 of expense attributable to a swap valuation allowance.

LIQUIDITY, UNINSURED DEPOSITS AND CAPITAL: During the first nine months of 2023, the banking industry experienced volatility driven by several high-profile regional 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. On-balance sheet liquidity (investments available for sale, interest-earning deposits and cash) was $756 million as of September 30, 2023.

The Company also had $2.8 billion of external borrowing capacity available as of September 30, 2023, which when combined with balance sheet liquidity, provided us with 294 percent coverage of our uninsured/unprotected deposits. Uninsured/unprotected deposits totaled $1.2 billion at September 30, 2023. External borrowing capacity includes secured available funding with the Federal Home Loan Bank and from the Federal Reserve Discount Window on a same day basis (subject to any practical constraints affecting these participants). 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, which offers an advance term of up to twelve months.

The Company's regulatory capital ratios at September 30, 2023 remains above well capitalized levels with common equity tier 1 capital ("CET1") and total risk-based capital ratios of 11.13 percent and 14.76 percent, respectively, for the Company and 13.22 percent and 14.47 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)

(In thousands)

(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 September 30, 2023, December 31, 2022 and September 30, 2022, the Bank had a concentration in commercial real estate (“CRE”) loans as defined by applicable regulatory guidance as follows:

The Bank believes it satisfactorily 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)

(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.

Average Balance Sheet

Unaudited

Nine Months Ended

(Dollars in thousands)

(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:

Net interest income, on a fully tax-equivalent basis, declined $9.0 million, or 20 percent, for the third quarter of 2023 to $36.9 million from $45.9 million for the same 2022 period. The net interest margin ("NIM") was 2.28 percent and 2.98 percent for the three months ended September 30, 2023 and 2022, respectively, a decrease of 70 basis points. The Company recorded net interest income, on a fully tax-equivalent basis, of $120.6 million for the nine months ended September 30, 2023, which represented a decrease of $8.4 million from $129.1 million for the same 2022 period. The NIM was 2.54 percent and 2.83 percent for the nine months ended September 30, 2023 and 2022, respectively, a decrease of 29 basis points. For the three and nine months ended September 30, 2023, when compared to 2022 net interest margin has been impacted by a rapid increase in interest expense mostly driven by higher deposit rates during 2023 and the increase in the average balance of FHLB advances and other borrowings. The ongoing Federal Reserve monetary policy tightening intended to slow inflation has led to a significant increase in interest rates, particularly rates impacting short term investments and deposits. This has resulted in an inversion of the U.S. Treasury yield curve driving an increase in deposit and borrowing costs at a faster rate than the yields on interest earning assets.

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 NIM improving by four basis points, and no impact to tangible capital or tangible book value per share.

The $311.5 million increase in the average balance of interest-earning assets when comparing the third quarter of 2023 and 2022 was due to growth of $356.7 million in loans to $5.49 billion from $5.13 billion and growth in investments of $50.7 million, partially offset by a decrease in interest-earning deposits of $95.8 million. For the nine months ended September 30, 2023, the average balance of interest-earning assets grew by $251.7 million when compared to the same 2022 period primarily due to growth in loans of $298.7 million to $5.39 billion, which was partially offset by a decline of interest-earning deposits of $27.8 million and investments of $19.3 million as part of the Company's balance sheet repositioning strategy explained above.

Interest-earning deposits are an additional part of the Company’s liquidity and interest rate risk management strategies. The combined average balance of these investments during the three months ended September 30, 2023 was $136.3 million compared to $232.2 million for the quarter ended September 30, 2022. The average yield on interest-earning deposits increased by 229 basis points to 4.29 percent for the quarter ended September 30, 2023 from 2.00 percent for the same period in 2022. The average balance of interest-earning deposits decreased to $147.1 million for the nine months ended September 30, 2023 with an average yield of 4.04 percent as compared to $174.8 million and an average yield of 1.15% for the same period in 2022. The increase in the average yield for both the three and nine months ended September 30, 2023 was due to the increase in the Federal Funds rate.

The growth in the average balance of loans for both the three and nine months ended September 30, 2023 was primarily driven by growth in commercial loans and residential mortgages. The average balance of commercial loans grew by $282.1 million, or 14 percent, to $2.30 billion from $2.02 billion for the quarter ended September 30, 2022. Additionally, the average balance of residential mortgages grew $67.1 million, or 13 percent, to $581.0 million for the quarter ended September 30, 2023 from $513.9 million for the same 2022 period. For the nine months ended September 30, 2023 the average balance of commercial loans grew $231.3 million, or 11 percent, to $2.25 billion from $2.02 billion for the same period in 2022. The average balance of residential mortgages increased by $44.2 million to $556.2 million for the nine months ended September 30, 2023.

The average balance of investments increased $50.7 million to $808.1 million for the quarter ended September 30, 2023 as compared to $757.4 million for the same 2022 period. During the nine months ended September 30, 2023, the average balance of investments decreased $19.3 million to $803.2 million from $822.4 million for the same 2022 period. The decrease for the nine months ended September 30, 2023 was primarily a result of the balance sheet repositioning strategy described above.

For the quarter ended September 30, 2023 and 2022 periods, the average yields earned on interest-earning assets were 4.91 percent and 3.62 percent, respectively, an increase of 129 basis points. For the nine months ended September 30, 2023 and 2022 periods, average yields earned on interest-earning assets were 4.73 percent and 3.26 percent, respectively, an increase of 147 basis points. The increase in yields on interest-earning assets for the three and nine months ended September 30, 2023, was primarily due to the increase in the target Federal Funds rate of 525 basis points. This resulted in increases in the yield on loans of 127 basis points to 5.27 percent, the yield on interest-earning deposits of 229 basis points to 4.29 percent and the yield on investments of 104 basis points to 2.56 percent, when comparing the three months ended September 30, 2023 to the same 2022 period. For the nine months ended September 30, 2023 the yield on loans increased 151 basis points to 5.10 percent, yield on interest-earning deposits increased 289 basis points to 4.04 percent, and yield on investments increased 78 basis points to 2.42 percent.

The average yield on total loans increased 127 basis points to 5.27 percent for quarter ended September 30, 2023 when compared to 4.00 percent for the same 2022 period. The average yield on total loans increased 151 basis points to 5.10 percent for the nine months ended September 30, 2023 when compared to 3.59 percent for the same 2022 period. The increase for both the three and nine months ended September 30, 2023 when compared to the prior periods were driven by an increase in the yield on commercial loans of 187 basis points to 6.50 percent for the three months ended September 30, 2023 and 227 basis points to 6.30 percent for the nine months ended September 30, 2023, due to an increase in target Federal Funds rate of 525 basis points which had a greater impact on theses loans, which are typically floating rates with short repricing periods. The yield on commercial mortgages for the quarter ended September 30, 2023 was 4.44 percent, which reflected an increase of 76 basis points when compared to the same 2022 period, while the yield for the nine months ended September 30, 2023 was 4.30 percent, which reflected an increase of 93 basis points when compared to the same 2022 period. The increases for both of these periods were primarily driven by the origination of loans with higher yields in the current higher interest rate environment. In addition, at September 30, 2023, 19 percent of our loans repriced within one month, 33 percent within three months and 46 percent within one year.

During the third quarter of 2023 and 2022, the Company recorded a yield on investments of 2.56 percent and 1.52 percent, respectively, an increase of 104 basis points, respectively. During the nine months ended September 30, 2023 and 2022, the Company recorded a yield on investments of 2.42 percent and 1.64 percent, respectively, an increase of 78 basis points, respectively. The increase in yield for the three and nine months ended September 30, 2023 was due to the Company purchasing higher-yielding investments during the latter half of 2022 and first nine months of 2023.

For the quarter ended September 30, 2023, the average balance of interest-bearing liabilities totaled $4.84 billion representing an increase of $381.1 million, or 9 percent, from $4.46 billion for the same 2022 period. The increase for the third quarter of 2023 when compared to same period of 2022 was driven by an increase in borrowings of $466.8 million to $470.6 million, partially offset by a decrease of interest-bearing deposits of $84.7 million to $4.23 billion for the three months ended September 30, 2023. The average balance of interest-bearing liabilities increased $169.7 million to $4.68 billion for the nine months ended September 30, 2023 from $4.51 billion for the nine months ended September 30, 2022. The increase for the nine months ended September 30, 2023 when compared to same period of 2022 was driven by an increase in borrowings of $310.3 million to $331.2 million, partially offset by a decrease of interest-bearing deposits of $139.7 million to $4.21 billion for the nine months ended September 30, 2023.

The decrease in the average balance of interest-bearing deposits was primarily due to a decline in the average balance of money market deposits for the three and nine months ended September 30, 2023 when compared to the same 2022 periods of $466.2 million and $361.8 million, respectively. Additionally, the three and nine months ended September 30, 2023 decline of interest-bearing deposits were due to savings deposits decreasing $49.6 million and $34.2 million, respectively. Money market and savings accounts declined in 2023 due to clients shifting balances into higher-yielding short-term Treasuries and interest-bearing checking accounts. These decreases were offset by an increase into checking accounts for the three and nine months ended September 30, 2023 of $404.9 million and $328.1 million, respectively due to the clients demand for FDIC insured products. The Company added a short-term brokered certificate of deposit ("CD") for $50.0 million in June 2023 and an additional $50.0 million CD in September to provide additional liquidity and replace brokered deposit run off. The average balance of retail CDs increased for the three months ended September 30, 2023 by $24.3 million due to consumer demand for higher-yielding deposit products.

The Company is a participant in the Reich & Tang Demand Deposit Marketplace ("DDM") program and the Promontory Program. The Company uses these deposit sweep services to place customer funds into interest-bearing demand (checking) accounts issued by other participating banks. Customer funds are placed at one or more participating banks to increase the level of FDIC insurance available to deposit customers. As a participant, the Company receives reciprocal amounts of deposits from other participating banks. Such reciprocal deposit balances were $982.9 million and $630.1 million for the quarter ended September 30, 2023 and 2022, respectively. The average balance of reciprocal deposits was $809.4 million and $667.7 million for nine months ended September 30, 2023 and 2022, respectively. The additional growth for the three and nine months ended September 30, 2023 in checking accounts was directly related to these programs.

At September 30, 2023, uninsured/unprotected deposits were approximately $1.2 billion, or 23 percent of total deposits. This amount was adjusted to exclude $294 million of public fund deposit balances, which are fully-collateralized and protected with securities and an FHLBNY letter of credit.

There was an increase in the average balance of borrowings of $466.8 million to $470.6 million for the quarter ended September 30, 2023 when compared to $3.8 million for the quarter ended September 30, 2022. The average balance of borrowings for the nine months ended September 30, 2023 increased $310.3 million to $331.2 million from $20.9 million for the same 2022 period. The increase in borrowings for the three and nine months was principally due to the need for additional funding due to the decline in demand deposits.

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.

For the quarters ended September 30, 2023 and 2022, the cost of interest-bearing liabilities was 3.47 percent and 0.85 percent, respectively, reflecting an increase of 262 basis points. The cost of interest-bearing liabilities was 2.97 percent and 0.58 percent for the nine months ended September 30, 2023 and 2022, respectively reflecting an increase of 239 basis points. The increases were driven by an increase in the average cost of interest-bearing deposits of 244 basis points to 3.18 percent for the third quarter of 2023 and 225 basis points to 2.72 percent for the nine months ended September 30, 2023. Additionally, the cost of borrowings increased 254 basis points to 5.58 percent for the third quarter of 2023 when compared to the third quarter of 2022. For the nine months ended September 30, 2023 the cost of borrowings increased 467 basis points to 5.33 percent when compared to the same 2022 period. The increase in deposit and borrowing rates was due to the Federal Reserve raising the target Federal Funds rate by 525 basis points since March 2022 and a change in the composition of the deposit portfolio.

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 September 30, 2023, the Company had investment securities available for sale with a fair value of $521.0 million compared with $554.6 million at December 31, 2022. A net unrealized loss (net of income tax) of $91.0 million and of $81.0 million related to these securities were included in shareholders’ equity at September 30, 2023 and December 31, 2022, respectively.

At September 30, 2023, the Company had investment securities held to maturity with a carrying cost of $108.9 million and an estimated fair value of $91.2 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 $12.6 million at September 30, 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 loss of $404,000 for the three and nine months ended September 30, 2023, as compared to an unrealized loss of $571,000 and $1.7 million for the same periods in 2022.

The carrying value of investment securities available for sale and held to maturity as of September 30, 2023 and December 31, 2022 are shown below:

(In thousands)

59

The following table presents the contractual maturities and yields of debt securities available for sale and held to maturity as of September 30, 2023. The weighted average yield is a computation of income within each maturity range based on the amortized cost of securities:

(A) Shown using stated final maturity.

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

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

(In thousands)

(In thousands)

60

The Company recorded total other income, excluding wealth management fee income, for the third quarter of 2023 and 2022 of $5.4 million and $3.4 million, respectively, reflecting an increase of $1.9 million or 56 percent. The Company recorded total other income, excluding wealth management fee income, of $14.0 million for the nine months ended September 30, 2023 compared to $14.5 million for the same period of 2022 (when excluding the $6.6 million loss on sale of securities executed in the nine months ended September 30, 2022), reflecting a decrease of $547,000.

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 three and nine months ended September 30, 2023 and 2022 both were negatively impacted by both market volatility and the higher interest rate environment resulting in lower sale premiums and origination volumes. The three and nine months ended September 30, 2023 had a decline of $131,000 to $491,000 and $3.9 million to $2.2 million, respectively, when compared to the same 2022 periods.

The Company recorded corporate advisory fee income for the third quarter of 2023 of $85,000 compared to $102,000 for the same period ended September 30, 2022. The nine months ended September 30, 2023 included $180,000 of corporate advisory fee income compared to $1.7 million for the same 2022 period. The higher amount in the prior year was related to one major corporate advisory/investment banking acquisition transaction closed during the first quarter of 2022.

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 quarter ended September 30, 2023, income from the sale of newly originated residential mortgage loans was $37,000 compared to $60,000 for the same quarter in 2022. The nine months ended September 30, 2023 included income from the sale of newly originated residential mortgages loans of $73,000 compared to $458,000 for the same 2022 period. The decrease for the three and nine months ended September 30, 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 September 30, 2023 and 2022 included income by the Equipment Finance Division related to equipment transfers to lessees of $2.3 million and $547,000, respectively. Additionally, the Company recorded income related to unused commercial line fees of $794,000 and $818,000 for the three months ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2023 and 2022, other income included income related to equipment transfers to lessees of $2.7 million and $972,000 for the nine months ended September 30, 2023 and 2022, respectively. Other income also included $2.5 million and $1.5 million of unused commercial lines fees for the nine months ended September 30, 2023 and 2022, respectively.

The Company recorded a $404,000 loss on the fair value adjustment for CRA equity securities in the third quarter of 2023 compared to a loss of $571,000 for the same 2022 period. During the nine months ended September 30, 2023 and 2022, the Company recorded a loss on the fair value adjustment for CRA equity securities of $404,000 and $1.7 million, respectively.

Other income for the nine months ended September 30, 2022, included a $6.6 million loss on securities due to the Company’s balance sheet repositioning, by selling lower-yielding securities and replacing them with higher-yielding like duration multifamily loans.

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

(In thousands)

61

(In thousands)

Operating expenses for the three months ended September 30, 2023 and 2022 totaled $37.4 million and $33.6 million, respectively, reflecting an increase of $3.9 million, or 11 percent. Operating expenses for the nine months ended September 30, 2023 increased $10.3 million, or 10 percent, to $110.7 million from $100.4 million for the same period in 2022. The increased operating expenses for the three and nine months ended September 30, 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 476 at September 30, 2022 to 515 at September 30, 2023; normal annual merit increases, and increased FDIC assessment expense. The three and nine months ended September 30, 2023 included expenses associated with the previously announced expansion into New York City. The nine months ended September 30, 2023 also included $2.0 million of expense associated with the retirement of certain employees, $175,000 of expenses associated with the closure of three retail branch locations, and restricted stock expense of $409,000 associated with additional shares being granted to executives due to performance measures exceeding peers. The nine months ended September 30, 2022 included expenses totaling $372,000 associated with the consolidation of private banking offices, $1.5 million of severance expense related to 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 September 30, 2023, reflecting a 5 percent increase from $9.9 billion at December 31, 2022 and an increase of 12 percent from $9.3 billion at September 30, 2022. The equity market had improved during the first nine months of 2023 and coupled with gross business inflows of $688 million, contributed to the increase in AUM/AUA.

In the September 2023 quarter, Peapack Private generated $14.0 million in fee income compared to $12.9 million for the September 2022 quarter, reflecting an 8 percent increase. For the nine months ended September 30, 2023, Peapack Private generated $42.0 million in fee income compared to $41.7 million in fee income for the same period in 2022, reflecting a 1 percent increase.

Operating expenses for the third quarter of 2023 declined slightly to $9.6 million as compared to $10.6 million for the third quarter of 2022. Operating expenses increased to $30.6 million for the nine months ended September 30, 2023 as compared to $29.4 million for the same period in 2023. Expenses relative to Peapack Private reflected increases due to overall growth in the business and new hires when comparing the nine months ended September 30, 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)

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

(B) Excludes modifications included in nonaccrual loans of $3.1 million at September 30, 2023 and $777,000 at June 30, 2023.

(C) 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.

(D) Amount excludes $13.4 million at December 31, 2022 and $12.9 million at September 30, 2022 of TDRs included in nonaccrual loans.

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

PROVISION FOR CREDIT LOSSES: The provision for credit losses was $5.9 million and $599,000 for the third quarters of 2023 and 2022, respectively. For the nine months ended September 30, 2023 and 2022, the provision for credit losses was $9.1 million and $4.4 million, respectively. The increased provision for credit losses for both the three and nine months ended September 30, 2023, when compared to the same periods for 2022, was due principally to specific reserves of $5.5 million for two freight related credits totaling $33.4 million that were transferred to nonaccrual status during the quarter. The freight industry is currently facing a significant downturn due to imbalance in supply and demand. Additionally, loan growth of $201.5 million contributed to the provision for credit losses during the first nine months of 2023. The allowance for credit losses was $68.6 million as of September 30, 2023, compared to $60.8 million at December 31, 2022. The increase in the allowance for credit losses (“ACL”) was due to the provision for credit losses of $9.1 million partially offset by net charge-offs of $1.3 million. The allowance for credit losses as a percentage of loans was 1.25 percent at September 30, 2023 compared to 1.15 percent at December 31, 2022. The ACL recorded on individually evaluated loans was $8.1 million at September 30, 2023 compared to $1.5 million as of December 31, 2022. Total individually evaluated loans were $70.1 million and $16.7 million as of September 30, 2023 and December 31, 2022, respectively. The increase in the balance of individually evaluated loans was primarily due to three multifamily relationships totaling $18.9 million and the above-mentioned freight related credits that transferred to nonaccrual status during the first nine months of 2023. The general component of the allowance increased from $59.3 million at December 31, 2022 to $60.5 million at September 30, 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.

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

(Dollars in thousands)

(A) Commencing on January 1, 2022, the allowance calculation is based on the CECL methodology. The provision to rollforward the ACL excludes a credit of $88,000 for the three months ended September 30, 2023, a provision of $30,000 for the three months ended June 30, 2023, 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 and a credit of $66,000 for the three months ended September 30, 2022 related to off-balance sheet commitments.

INCOME TAXES: Income tax expense for the quarter ended September 30, 2023 was $3.8 million as compared to $7.6 million for the same period in 2022. During the nine months ended September 30, 2023, the Company recorded income tax expense of $15.4 million compared to $19.2 million for the same period in 2022.

The effective tax rate for the three months ended September 30, 2023 was 30.52 percent compared to 27.47 percent for the same quarter in 2022. The higher tax rate for the 2023 quarter was primarily due to the impact of certain non-deductible expenses related to compensation and benefits. The effective tax rate for the nine months ended September 30, 2023 was 27.67 percent compared to 26.32 percent for the same 2022 period.

The nine months ended September 30, 2023 and 2022 both benefited from the vesting of restricted stock at prices higher than grant prices. The nine months ended September 30, 2023 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 increased as a result of net income of $40.3 million for the nine months ended September 30, 2023 which was partially offset by additional loss in accumulated other comprehensive losses of $7.4 million, net of tax ($10.0 million loss related to the available for sale portfolio and a $2.6 million gain on cash flow hedges), purchases of shares through the Company’s stock repurchase program and $2.6 million for cash dividends paid during the period. The Company repurchased 367,014 shares, at an average price of $28.29, for a total cost of $10.4 million during the nine months ended September 30, 2023.

The Company employs quarterly capital stress testing by modeling adverse case and severely adverse case scenarios. In the most recent completed stress test based on June 30, 2023 financial information, under the severely adverse case, and no growth scenarios, the Bank remains well capitalized over a two-year stress period.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Total, Common Equity Tier 1 and Tier 1 capital (each as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). At September 30, 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 below.

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 10.75 percent at September 30, 2023.

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

(Dollars in thousands)

(A) See footnote on following table.

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

(Dollars in thousands)

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

The Dividend Reinvestment Plan of Peapack-Gladstone Financial Corporation, or the “Reinvestment Plan,” allows shareholders of the Company to purchase additional shares of common stock using cash dividends without payment of any brokerage commissions or other charges. Shareholders may also make voluntary cash payments of up to $200,000 per quarter to purchase additional shares of common stock. Voluntary share purchases in the “Reinvestment Plan” can be filled from the Company’s authorized but unissued shares and/or in the open market, at the discretion of the Company. All shares purchased during the quarter ended September 30, 2023 were purchased in the open market.

On September 27, 2023, the Board of Directors declared a regular cash dividend of $0.05 per share payable on November 27, 2023 to shareholders of record on November 9, 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. Cash and cash equivalents, including interest-earning deposits, totaled $187.9 million at September 30, 2023. In addition, the Company had $521.0 million in securities designated as available for sale at September 30, 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 $414.0 million and $99.0 million as of September 30, 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 September 30, 2023, the Company had approximately $2.8 billion of external borrowing capacity available on a same day basis (subject to any practical constraints affecting the FHLB or FRB), which when combined with balance sheet liquidity provided the Company with 294 percent coverage of our uninsured/unprotected deposits.

Brokered interest-bearing demand (“overnight”) deposits were $10.0 million at September 30, 2023. The Company ensures ample available collateralized liquidity as a backup to these short-term brokered deposits. As of September 30, 2023, the Company had transacted pay fixed, receive floating interest rate swaps totaling $310.0 million in notional amount.

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

Management believes the Company’s liquidity position and sources were adequate at September 30, 2023.

ASSET/LIABILITY MANAGEMENT: The Company’s management Asset/Liability Committee (“ALCO”) is responsible for developing, implementing and monitoring asset/liability 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 September 30, 2023.

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 executed a floating to fixed swap with the borrower. At the same time, the Company executes a third-party swap, the terms of which fully offset the fixed exposure and, result in a final floating rate exposure for the Company. As of September 30, 2023, $580.6 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 September 30, 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 September 30, 2023.

In an immediate and sustained 100 basis point increase in market rates at September 30, 2023, net interest income would decrease approximately 2.2 percent in year 1 and increase by 0.3 percent in year 2, compared to a flat interest rate scenario. In an immediate and sustained 100 basis point decrease in market rates at September 30, 2023, net interest income would increase approximately 2.4 percent for year 1 and decrease 0.4 percent for year 2, compared to a flat interest rate scenario.

In an immediate and sustained 200 basis point decrease in market rates at September 30, 2023, net interest income for year 1 would increase approximately 3.7 percent, when compared to a flat interest rate scenario. In year 2, net interest income would decrease 1.6 percent, when compared to a flat interest rate scenario.

The Company's interest rate sensitivity models indicate the Company is liability sensitive as of September 30, 2023 and that net interest income would improve in a falling rate environment, but decline in a rising 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 September 30, 2023.

(Dollars in thousands)

(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.

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 Exchange Act) 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 individual acts , 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 September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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, as updated by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023.