Peapack Gladstone Financial Corp: Form 10-Q for the period ended Sep 30, 2024

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, 2023, 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 2024 and beyond;
• our ability to successfully integrate wealth management firm and team 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 or charge-offs;
• 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, including our expansion into New York City;
• a reduction in the availability of 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;
• demand for loans and deposits in our market areas;
• adverse changes in securities markets;
• changes in New York City rent regulation law;
• 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 financial condition, 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, 2023 contains a summary of the Company’s significant accounting policies.

The Company’s 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 the methodology for determining the allowance for credit losses or 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 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 economic conditions, as well as the incorporation of reasonable and supportable forecasts. Management evaluates a variety of factors including available published economic information in arriving at its forecast. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. Also included in the allowance for credit losses are qualitative reserves that are expected, but, in the Management’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. Factors may include changes in lending policies and procedures, size and composition of the portfolio, experience and depth of Management and the effect of external factors such as competition, legal and regulatory requirements, among others. The allowance is available for any loan that, in Management’s 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 the 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, 2024 and 2023.

(Dollars in thousands, except per share data)

The following table presents certain key aspects of our performance for the nine months ended September 30, 2024 and 2023.

(Dollars in thousands, except per share data)

50

For the quarter ended September 30, 2024, the Company recorded total revenue of $56.6 million, pretax income of $10.7 million, net income of $7.6 million and diluted earnings per share of $0.43, compared to 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 for the same period last year.

For the nine months ended September 30, 2024, the Company recorded total revenue of $166.3 million, pretax income of $32.7 million, net income of $23.7 million and diluted earnings per share of $1.34, compared to 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 for the same period last year.

During 2024, the Company expanded into the metro New York market, leading with our "Single Point of Contact" private banking strategy, which continues to demonstrate progress and positive momentum. Increasing deposits through the growth of core deposit relationships has enabled us to repay all short-term borrowings, which enhances our liquidity position and improves net interest margin.

The decrease in net income for both the three and nine month 2024 periods when compared to the same 2023 periods was principally driven by increased operating expenses, which was principally attributable to the Company's expansion into New York City and expanding our unique private banking model that offers a single point of contact for all banking services. The decrease in net income for the nine month 2024 period when compared to the same 2023 period was also driven by the Company's decreased net interest income due to net interest margin contraction, as a result of higher deposit and borrowings rates. The Company has seen positive momentum in net interest margin during the second and third quarters of 2024, as a result of paying down overnight borrowings with core deposit growth at a lower cost. During 2024, deposits grew $661.3 million, which included $122.2 million in noninterest-bearing demand deposits. Other income and wealth management fee income continue to be a consistent and steady revenue stream for the Company.

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, 2023 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 interest-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, 2024, December 31, 2023 and September 30, 2023, the Bank had a concentration in commercial real estate (“CRE”) loans as defined by applicable regulatory guidance as follows:

Total CRE concentration as a percentage of regulatory capital continues to steadily decline. Management 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 three month period ended September 30, 2024 compared to September 30, 2023 are shown below:

The effect of volume and rate changes on net interest income (on a tax-equivalent basis) for the nine month period ended September 30, 2024 compared to September 30, 2023 are shown below:

Net interest income, on a fully tax-equivalent basis, increased $1.0 million, or 3 percent, for the third quarter of 2024 to $37.9 million from $36.9 million for the same 2023 period. The net interest margin ("NIM") was 2.34 percent and 2.28 percent for the three months ended September 30, 2024 and 2023, respectively, an increase of 6 basis points. For the nine months ended September 30, 2024, the Company recorded net interest income, on a fully tax-equivalent basis, of $107.9 million compared to $120.6 million for the same 2023 period. The NIM was 2.26 percent and 2.54 percent for the nine months ended September 30, 2024 and 2023, respectively, a decrease of 28 basis points. Net interest income, on a fully tax- equivalent basis, and NIM expanded during the quarter ended September 30, 2024, due to the Bank's focus on growing client deposit relationships, which were used to pay down higher cost overnight borrowings. The decrease in net interest income, on a fully tax-equivalent basis, and NIM for the nine months ended September 30, 2024 compared to the same 2023 period, was predominately due to a rapid increase in interest expense mostly driven by higher deposit rates, partially offset by a decrease in the average balance of borrowed funds and an increase in loan yields. The Federal Reserve monetary policy 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 . The Federal Reserve decreased the target Federal Funds rate by 50 basis points at the September Federal Open Market Committee meeting though the impact of these rate cuts had minimal impact on results for the three month period ended September 30, 2024.

The average balance of interest-earning assets increased slightly to $6.45 billion during the third quarter of 2024 from $6.43 billion for the same 2023 period, reflecting an increase of $19.3 million. Average interest-earning assets were $6.37 billion for the nine months ended September 30, 2024 compared to $6.34 billion in the same 2023 period, representing an increase of $27.9 million. The increase in average interest-earning assets included an increase in the average balance of interest-earning deposits of $190.4 million and $78.0 million, respectively, as well as an increase in average investments of $57.8 million and $17.4 million, respectively, for both the three and nine months ended September 30, 2024 as compared to the same 2023 periods. These increases were partially offset by a decline in the average balance of loans for both the three and nine months ended September 30, 2024 of $228.9 million and $67.6 million, respectively, when compared to the same 2023 periods.

The decline in the average balance of loans for the quarter ended September 30, 2024 was primarily driven by a decline in commercial mortgages and commercial loans, offset slightly by growth in installment loans. The average balance of commercial loans declined by $139.1 million, or 6 percent, to $2.16 billion for the quarter ended September 30, 2024 when compared to $2.30 billion for the same 2023 period. The average balance of commercial mortgages for the three months ended September 30, 2024 declined by $120.6 million, or 5 percent, to $2.38 billion when compared to the same 2023 period. These decreases were partially offset by an increase in the average balance of installment loans of $17.2 million to $73.4 million for the quarter ended September 30, 2024 when compared to the same 2023 period. The average balance of loans for the nine months ended September 30, 2024 decreased due to declines in commercial mortgages and commercial loans partially offset by growth in installment loans and residential mortgages. The average balance of commercial loans declined by $50.9 million to $2.20 billion for the nine months ended September 30, 2024 when compared to the same 2023 period. The average balance of commercial mortgages for the nine months ended September 30, 2024 declined by $74.4 million to $2.42 billion when compared to the same 2023 period. Residential mortgages increased by $22.0 million to $578.2 million for the nine months ended September 30, 2024 from $556.2 million for the nine months ended September 30, 2023. The average balance of installment loans increased by $19.4 million to $68.6 million for the nine months ended September 30, 2024 from $49.2 million for the same period in 2023. The decline in the average balance of loans for both the three- and nine-month periods were mostly a result of the Company tightening underwriting guidelines, pay downs of higher rate lines of credit and lower originations due to the higher interest rate environment.

For the quarters ended September 30, 2024 and 2023, the average yields earned on interest-earning assets were 5.18 percent and 4.91 percent, respectively, an increase of 27 basis points. For the nine months ended September 30, 2024 and 2023, the average yield on interest-earning assets were 5.08 percent and 4.73 percent, respectively, an increase of 35 basis points. The increase in yields on interest-earning assets for the three and nine months ended September 30, 2024, was primarily due to the increase in the target Federal Funds rate of 100 basis points during 2023 (525 basis points since the Federal Reserve commenced raising rates in March 2022). This resulted in increases for the three-month periods of 31 basis points on loans to 5.58 percent, of 59 basis points on interest-earning deposits to 4.88 percent and of 26 basis points on investments to 2.82 percent, when comparing the quarter ended September 30, 2024 to the same 2023 period. Increases in the average yields for the nine-month periods were 36 basis points on loans to 5.46 percent, 65 basis points on interest-earning deposits to 4.69 percent and 25 basis points on investments to 2.67 percent.

The average yield on total loans for the three and nine months ended September 30, 2024 compared to the same 2023 periods was driven by an increase in the yield on commercial loans, commercial mortgages and residential mortgages. The yield on commercial loans for the three months ended September 30, 2024 increased 46 basis points to 6.96 percent from 6.50 percent at September 30, 2023. The yield on commercial loans for the nine months ended September 30, 2024 increased 51 basis points to 6.81 percent from 6.30 percent for the same period in 2023. The average yield on commercial loans increased for both the three- and nine-month periods due to an increase in the target Federal Funds rate, which had a greater impact on these loans, that are typically floating rates with short repricing periods. The average yield on commercial mortgages increased 16 basis points to 4.60 percent and 20 basis points to 4.50 percent for the three and nine months ended September 30, 2024, respectively, when compared to the same 2023 periods. The average yield on residential mortgages increased 43 basis points to 4.02 percent and 42 basis points to 3.88 percent, for the three and nine months ended September 30, 2024, respectively, when compared to the same 2023 periods. The increase for both commercial and residential mortgages for the three- and nine-month periods were driven by the origination of loans with higher yields in the current higher interest rate environment. As of September 30, 2024, 30 percent of our loans will reprice within one month, 35 percent within three months and 49 percent within one year.

For the three months ended September 30, 2024, the average balance of interest-bearing liabilities totaled $4.82 billion representing a decrease of $22.3 million from $4.84 billion for the same 2023 period due a decrease in overnight borrowings of $470.6 million to no overnight borrowings at September 30, 2024. This decrease was partially offset by an increase in interest-bearing deposits of $450.5 million to $4.68 billion at September 30, 2024. For the nine months ended September 30, 2024, the average balance of interest-bearing liabilities totaled $4.80 billion representing an increase of $114.9 million from $4.68 billion for the same 2023 period due to an increase in interest-bearing deposits of $360.3 million to $4.58 billion partially offset by a decrease in overnight borrowings of $243.9 million to $87.2 million for the nine months ended September 30, 2024.

The increase in the average balance of interest-bearing deposits for the quarter ended September 30, 2024 compared to the 2023 comparable period was primarily due to an increase in the average balances of interest-bearing checking deposits of $401.1 million, retail certificate of deposits ("CD") of $97.1 million and money market accounts of $61.5 million. The increase in the average balance of interest-bearing deposits for the nine months ended September 30, 2024 compared to the 2023 comparable period was primarily due to increases in the average balances of interest-bearing checking deposits of $349.1 million, retail CDs of $111.9 million and short-term brokered CDs of $26.1 million, partially offset by declines in the average balance of money market and savings accounts of $121.5 million. The increase in interest-bearing checking deposits for the three and nine months ended September 30, 2024 was principally attributable to client demand for FDIC insured products. The Company added short-term brokered CDs to provide additional liquidity and replace brokered deposit run-off. The decrease for the savings and money market accounts for the nine months ended September 30, 2024 included clients shifting balances into higher-yielding short-term Treasuries and interest-bearing checking accounts. The expansion into New York City is starting to benefit deposit growth and has reduced the Company's reliance on overnight borrowings, brokered deposits and other high cost funding sources while shifting funding into lower cost, relationship deposits.

The Company is a participant in the Reich & Tang Demand Deposit Marketplace 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. Average reciprocal deposit balances for the quarters ended September 30, 2024 and 2023, were $1.32 billion and $982.9 million, respectively. Average reciprocal deposit balances for the nine months ended September 30, 2024 and 2023, were $1.20 billion and $809.4 million, respectively. The additional growth for the three and nine months ended September 30, 2024 was directly related to clients' desire for the increased level of FDIC insurance offered by these programs.

At September 30, 2024, uninsured/unprotected deposits were approximately $1.4 billion, or 24 percent of total deposits. This amount was adjusted to exclude $354 million of public fund deposit balances, which are fully-collateralized and protected with securities and an FHLBNY letter of credit.

The Company did not have any short-term borrowings during the third quarter of 2024 compared to $470.6 million for the same 2023 period. The average balance of borrowings decreased $243.9 million to $87.2 million for the nine months ended September 30, 2024, compared to $331.2 million for the same 2023 period. The decrease in borrowings for both periods was driven by the growth in client deposits led by the Company’s expansion into New York City, which were used to pay down borrowings.

For the quarters ended September 30, 2024 and 2023, the cost of interest-bearing liabilities was 3.78 percent and 3.47 percent, respectively, reflecting an increase of 31 basis points. The cost of interest-bearing liabilities was 3.74 percent and 2.97 percent for the nine months ended September 30, 2024 and 2023, respectively. The increases for both the three and nine months ended September 30, 2024 were driven by an increase in the average cost of interest-bearing deposits of 56 basis points to 3.74 percent for the third quarter of 2024 and 94 basis points to 3.66 percent for the nine months ended September 30, 2024. The Company benefitted from no short-term borrowing costs in the third quarter of 2024 compared to an average cost of 5.58 percent for the same 2023 period. For the nine months ended September 30, 2024, the average cost of borrowings increased 55 basis points to 5.88 percent from 5.33 percent for the same 2023 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, as clients continue to migrate into higher-yielding alternatives.

INVESTMENT SECURITIES: Investment securities available for sale are purchased, sold and/or maintained as a part of the Company’s overall balance sheet and interest rate risk management strategies, and in response to 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, 2024, the Company had investment securities available for sale with a fair value of $682.7 million compared with $550.6 million at December 31, 2023. The increase in investment securities available for sale was due to the use of excess funds for security purchases as deposit growth outpaced loan growth during the first nine months of 2024. A net unrealized loss (net of income tax) of $57.6 million and of $69.2 million related to these securities were included in shareholders’ equity at September 30, 2024 and December 31, 2023, respectively.

At September 30, 2024, the Company had investment securities held to maturity with a carrying cost of $103.2 million and an estimated fair value of $92.4 million compared with a carrying cost of $107.8 million and an estimated fair value of $94.4 million at December 31, 2023.

The Company had one equity security (a CRA investment security) with a fair value of $13.4 million and $13.2 million at September 30, 2024 and December 31, 2023, respectively, with changes in fair value recognized in the Consolidated Statements of Income. The Company recorded an unrealized gain of $474,000 and $279,000 for the three and nine months ended September 30, 2024, respectively, as compared to an unrealized loss of $404,000 for the three and nine months ended September 30, 2023.

The carrying value of investment securities available for sale and held to maturity as of September 30, 2024 and December 31, 2023 are shown below:

(In thousands)

58

The following table presents the contractual maturities and yields of debt securities available for sale and held to maturity as of September 30, 2024. 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.

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

(In thousands)

(In thousands)

The Company recorded total other income, excluding wealth management fee income, of $3.8 million for the third quarter of 2024 compared to $5.4 million for the same 2023 period, reflecting a decrease of $1.6 million. For the nine months ended September 30, 2024 and 2023, the Company recorded total other income, excluding wealth management fee income, of $13.2 million and

$14.0 million, respectively, reflecting a decrease of $781,000. The decreases were primarily due to income associated with equipment transfers upon the termination of leases, which declined $2.1 million to $225,000 for the three months ended September 30, 2024 from $2.3 million for the same 2023 period and declined $727,000 to $1.9 million for the nine months ended September 30, 2024 from $2.7 million for the same 2023 period.

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 Company recorded a gain on the sale of SBA loans of $365,000 and $491,000 for the quarters ended September 30, 2024 and 2023, respectively. For the nine months ended September 30, 2024 and 2023, the Company recorded a gain on the sale of SBA loans of $1.2 million and $2.2 million, respectively. The Company continues to see pressure from 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 third quarter of 2024 of $55,000 compared to $85,000 for the same period ended September 30, 2023. The nine months ended September 30, 2024 included $976,000 of corporate advisory fee income compared to $180,000 for the same 2023 period. The higher amount for the nine months ended September 30, 2024 was related to a corporate advisory/investment banking acquisition transaction completed in the first quarter of 2024.

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

For the quarter ended September 30, 2024, income from the sale of newly originated residential mortgage loans was $15,000 compared to $37,000 for the same period in 2023. The Company recorded income from the sale of newly originated residential mortgage loans for the nine months ended September 30, 2024 and 2023 of $105,000 and $73,000, respectively. The Company continues to be impacted by the industry wide slowdown in refinancing and home purchase activity in the higher interest rate environment.

Other income included $225,000 of income by the Equipment Finance Division related to equipment transfers to lessees upon the termination of leases for the third quarter of 2024 compared to $2.3 million for the same 2023 period. The nine months ended September 30, 2024 and 2023 included $1.9 million and $2.7 million, respectively, of income related to equipment transfers to lessees upon the termination of leases. Additionally, the Company recorded $845,000 of unused commercial line fees for the quarter ended September 30, 2024 compared to $794,000 for the same 2023 period. Unused line fees were $2.5 million for both the nine months ended September 30, 2024 and 2023. The three and nine months ended September 30, 2024 included $55,000 and $236,000, respectively, of additional income from life insurance proceeds.

The Company recorded a $474,000 of positive fair value adjustment and $404,000 negative fair value adjustment for CRA equity securities in the third quarter of 2024 and 2023, respectively. The nine months ended September 30, 2024 included a $279,000 positive fair value adjustment for CRA equity securities, compared to a $404,000 negative fair value adjustment for the same 2023 period. The increase in 2024 was predominantly due to the underlying assets being tied to medium-term investments and the Federal Reserve's decision to lower interest rates in September 2024.

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

(In thousands)

60

(In thousands)

Operating expenses for the quarter ended September 30, 2024 and 2023 totaled $44.6 million and $37.4 million, respectively, reflecting an increase of $7.2 million, or 19 percent. Operating expenses for the nine months ended September 30, 2024 increased $17.1 million, or 15 percent, to $127.8 million from $110.7 million for the same 2023 period. The increase in operating expenses for both 2024 periods, when compared to the same prior year periods, was principally attributable to the Company's expansion into New York City, which included the hiring of multiple teams and expenses related to the opening of office and retail space in our Park Avenue location in New York City. The 2024 periods included additional expense associated with annual merit increases and increased employee benefits, increased credit costs, as well as increased office space, computer and software equipment costs related to the New York City expansion. The nine months ended September 30, 2023 included $2.0 million of expense associated with retirements of certain employees and $175,000 of expenses associated with the closure of three retail branch locations.

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 $12.1 billion at September 30, 2024, reflecting a 11 percent increase from $10.9 billion at December 31, 2023 and an increase of 16 percent from $10.4 billion at September 30, 2023. The equity market improved during the first nine months of 2024 and coupled with gross business inflows of $547 million, contributed to the increase in AUM/AUA.

In the September 2024 quarter, Peapack Private generated $15.2 million in fee income compared to $14.0 million for the September 2023 quarter, reflecting an 8 percent increase. For the nine months ended September 30, 2024, Peapack Private generated $46.0 million in fee income compared to $42.0 million in fee income for the same period in 2023, reflecting a 10 percent increase. The increase in fee income for the three and nine months ended September 30, 2024 was largely due to the improved equity and bond markets during the first nine months of 2024 and new business inflows.

Operating expenses relative to Peapack Private, for the three months ended September 30, 2024, increased slightly to $10.0 million as compared to $9.6 million for the third quarter of 2023. Operating expenses relative to Peapack Private, for the nine months ended September 30, 2024, declined to $30.1 million as compared to $30.6 million for the nine months ended September 30, 2023. 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 $3.7 million at September 30, 2024, $3.2 million at June 30, 2024, $3.2 million at March 31, 2024, $3.0 million at December 31, 2023 and $3.1 million at September 30, 2023.

(C) Nonperforming loans/assets do not include performing modifications.

The Company had increases in nonperforming assets, performing modifications, loans subject to special mention, classified loans and individually evaluated loans at September 30, 2024 compared to December 31, 2023. The persistent nature of the elevated interest rate environment combined with inflationary pressures have presented challenges for certain borrowers, which is reflected in the trend of asset quality data in recent quarters. The increase in nonperforming assets since the beginning of 2024 was primarily driven by six multifamily loan relationships that have been classified as nonperforming loans during the current year. The increase in special mention loans was primarily due to an increase in multifamily loans of $51.1 million. There were several loan modifications made during the first nine months of 2024, which included one investment commercial real estate loan, one commercial loan and one equipment finance of $17.3 million, $11.7 million and $10.5 million, respectively, that were completed during the third quarter of 2024. Loans past due 30 through 89 days at September 30, 2024 included $19.7 million of multifamily loans to two sponsors. Subsequent to September 30, 2024 these loans have been placed on nonaccrual status and downgraded to substandard. The increase in classified loans was primarily driven by an increase in multifamily loans of $16.5 million, investment commercial real estate of $17.2 million and commercial loans of $27.6 million when compared to December 31, 2023. The increase in the balance of individually evaluated substandard loans was primarily due to six multifamily relationships totaling $31.8 million that transferred to nonaccrual status during the first nine months of 2024 which was partially offset by the sale of two multifamily individually evaluated loans totaling $15.1 million.

PROVISION FOR CREDIT LOSSES: The provision for credit losses was $1.2 million and $5.9 million for the third quarters of 2024 and 2023, respectively. For the nine months ended September 30, 2024 and 2023, the provision for loan losses was $5.8 million and $9.1 million, respectively. The decreased provision for credit losses for the three months ended September 30, 2024, when compared to the three months ended September 30, 2023 was driven by overall slower loan growth and a recovery of approximately $2.1 million, partially offset by additional specific reserves related to certain isolated credits of $1.8 million. The higher provision for credit losses for the third quarter of 2023 was due principally to a specific reserve of $4.5 million for a freight-related credit that was transferred to nonaccrual. The allowance for credit losses (“ACL”) was $71.3 million as of September 30, 2024, compared to $65.9 million at December 31, 2023. The increase in the ACL was primarily related to an increase in the ACL related to multifamily loans, which was driven by the increase in individually evaluated loans of $16.7 million and certain qualitative adjustments in the CECL calculation made during the first nine months of 2024. The allowance for credit losses as a percentage of loans was 1.34 percent at September 30, 2024 compared to 1.21 percent at December 31, 2023. The ACL recorded on individually evaluated loans was $9.7 million at September 30, 2024 compared to $4.5 million as of December 31, 2023. Total individually evaluated loans were $80.0 million and $60.7 million as of September 30, 2024 and December 31, 2023, respectively. The general component of the allowance increased from $61.4 million at December 31, 2023 to $61.6 million at September 30, 2024.

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 of 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 economic conditions, as well as the incorporation of reasonable and supportable forecasts. Management evaluates a variety of factors including available published economic information in arriving at its forecast. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. Also included in the allowance for credit losses are qualitative reserves that are expected, but, in the Management’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. Factors may include changes in lending policies and procedures, size and composition of the portfolio, experience and depth of management and the effect of external factors such as competition, legal and regulatory requirements, among others. The allowance is available for any loan that, in Management’s judgment, should be charged off.

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

(Dollars in thousands)

(A) Excludes a credit of $3,000 at September 30, 2024, a provision of $10,000 at June 30, 2024, a provision of $12,000 at March 31, 2024, a credit of $55,000 at December 31, 2023 and a credit of $88,000 at September 30, 2023 related to off-balance sheet commitments.

The decrease in the allowance for credit losses as a percentage of nonperforming loans was primarily due to the increase in nonperforming loans of $9.6 million to $80.5 million at September 30, 2024 from $70.8 million at September 30, 2023.

INCOME TAXES: Income tax expense for the quarter ended September 30, 2024 was $3.2 million as compared to $3.8 million for the same period in 2023. During the nine months ended September 30, 2024, the Company recorded income tax expense of $9.0 million compared to $15.4 million for the same period in 2023.

The effective tax rate for the three months ended September 30, 2024 was 29.40 percent compared to 30.52 percent for the same quarter in 2023. The effective tax rate was 27.41 percent and 27.67 percent for the nine months ended September 30, 2024 and 2023, respectively.

The nine months ended September 30, 2024 periods included a benefit related to the Company's deferred tax asset associated with a surtax imposed by the State of New Jersey. This benefit was partially offset by adjustments related to the vesting of restricted stock at prices lower than original grant prices in 2024, while 2023 benefited from the vesting of restricted stock at prices higher than original grant prices.

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 current Strategic Plan. The Company’s capital strategy is intended to provide stability to expand its business, even in stressed environments. Quarterly stress testing is integral to the Company’s capital management process.

The Company strives to maintain capital levels in excess of internal “triggers” and in excess of those considered to be well capitalized under regulatory guidelines applicable to banks 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 $23.7 million for the nine months ended September 30, 2024. Additionally, during the nine months of 2024, the Company recorded a decrease in accumulated other comprehensive loss of $10.1 million, net of tax. The total accumulated other comprehensive loss declined to $54.8 million as of September 30, 2024, ($57.6 million loss related to the available for sale securities portfolio partially offset by a $2.8 million gain on the cash flow hedges). This was partially offset by the repurchase of 300,000 shares, at an average price of $23.96 through the Company's stock repurchase program at a total cost of $7.2 million and payment of dividends of $2.7 million.

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, 2024 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, 2024 and December 31, 2023, 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 10.99 percent at September 30, 2024.

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, 2024 were purchased in the open market.

On September 25, 2024, the Board of Directors declared a regular cash dividend of $0.05 per share payable on November 22, 2024 to shareholders of record on November 7, 2024.

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, loan participations and brokered CDs.

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 $492.7 million at September 30, 2024. The Company's elevated liquidity position was due to deposit growth of $661.3 million and loan contraction of $113.9 million during the first nine months of 2024. In addition, the Company had $682.7 million in securities designated as available for sale at September 30, 2024. 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 $590.8 million and $101.1 million as of September 30, 2024, 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, 2024, the Company had approximately $3.0 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 293 percent coverage of our uninsured/unprotected deposits.

Brokered interest-bearing demand (“overnight”) deposits were $10.0 million at September 30, 2024. The interest rate paid on these deposits allows the Bank to fund operations at attractive rates and engage in interest rate swaps to hedge its asset-liability interest rate risk. The Company ensures ample available collateralized liquidity as a backup to these short-term brokered deposits. As of September 30, 2024, the Company had transacted pay fixed, receive floating interest rate swaps totaling $360.0 million in notional amount.

The Company allowed $120.5 million of brokered certificates of deposits to mature during the nine months ended September 30, 2024. These deposits were replaced by lower cost core relationship deposits as of September 30, 2024.

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

Management believes the Company’s liquidity position and sources were adequate at September 30, 2024.

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 the 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 $360.0 million as of September 30, 2024.

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, 2024, $466.8 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, 2024. 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, 2024.

In an immediate and sustained 100 basis point increase in market rates at September 30, 2024, net interest income would be flat in year 1 and increase by 2.2 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, 2024, net interest income would decrease approximately 1.2 percent for year 1 and decrease 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 September 30, 2024, net interest income would increase approximately 1.1 percent in year 1 and increase by 5.2 percent in year 2, compared to a flat interest rate scenario. In an immediate and sustained 200 basis point decrease in market rates at September 30, 2024, 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 9.2 percent, when compared to a flat interest rate scenario.

The Company's interest rate sensitivity models indicate the Company is asset sensitive as of September 30, 2024 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 September 30, 2024.

(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 that judgments in decision-making can be faulty and that breakdowns occur because of simple error or mistake. Further, controls can be circumvented. 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, 2024, 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, 2023.