# Peapack Gladstone Financial Corp: Form 10-Q for the period ended Sep 30, 2021

- Company: [Peapack Gladstone Financial Corp](/companies/pgc.md) (CIK 1050743)
- Form: 10-Q
- Filed: 2021-11-08
- Accepted by EDGAR: Nov 8, 2021, 11:12 ET
- Period: 2021-09-30
- Accession: 0001564590-21-055112
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1050743/000156459021055112/pgc-10q_20210930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1050743/000156459021055112/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-07-01 to 2021-09-30 | $53.0m | us-gaap:Revenues |
| Revenue | 9 months, 2021-01-01 to 2021-09-30 | $154.1m | us-gaap:Revenues |
| Interest expense | 3 months, 2021-07-01 to 2021-09-30 | $4.9m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2021-01-01 to 2021-09-30 | $17.1m | us-gaap:InterestExpense |
| Income tax | 3 months, 2021-07-01 to 2021-09-30 | $5.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2021-01-01 to 2021-09-30 | $15.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2021-07-01 to 2021-09-30 | $14.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2021-01-01 to 2021-09-30 | $41.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-07-01 to 2021-09-30 | $0.74 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2021-01-01 to 2021-09-30 | $2.15 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2021-07-01 to 2021-09-30 | $0.76 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2021-01-01 to 2021-09-30 | $2.21 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2021-07-01 to 2021-09-30 | 19,273,831 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2021-01-01 to 2021-09-30 | 19,390,522 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2021-01-01 to 2021-09-30 | $68.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2021-01-01 to 2021-09-30 | $3.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2021-01-01 to 2021-09-30 | $2.8m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2021-01-01 to 2021-09-30 | $19.4m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2021-09-30 | $6.24bn | us-gaap:Assets |
| Total liabilities | at 2021-09-30 | $5.70bn | us-gaap:Liabilities |
| Shareholders' equity | at 2021-09-30 | $543.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 83,487 characters.

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

### AND RESULTS OF OPERATIONS

**FORWARD LOOKING STATEMENTS:** This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about Management’s confidence and strategies and Management’s expectations about operations, growth, financial results, new and existing programs and products, investments, relationships, opportunities and market conditions. These statements may be identified by such forward-looking terminology as “expect”, “look”, “believe”, “anticipate”, “may”, or similar statements or variations of such terms. Actual results may differ materially from such forward-looking statements. Factors that may cause results to differ materially from those contemplated by such forward-looking statements include, among others, those risk factors identified in the Company’s Form 10-K for the year ended December 31, 2020, in addition to/which include the following:

- our inability to successfully grow our business and implement our strategic plan, including an inability to generate revenues to offset the increased personnel and other costs related to the strategic plan;
- the impact of anticipated higher operating expenses in 2021 and beyond;
- our inability to successfully integrate wealth management firm acquisitions;
- our inability to manage our growth;
- our inability to successfully integrate our expanded employee base;
- an unexpected decline in the economy, in particular in our New Jersey and New York market areas;
- declines in our net interest margin caused by the interest rate environment and/or our highly competitive market;
- declines in the value in our investment portfolio;
- the impact of a pandemic event on our business, operations, customers, allowance for loan losses and capital levels;
- higher than expected increases in our allowance for loan and lease losses;
- higher than expected increases in loan and lease losses or in the level of delinquent, nonperforming, classified and criticized loans;
- changes in interest rates;
- 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 information technology (“IT”) infrastructure and that of our IT and third-party providers;
- higher than expected FDIC insurance premiums;
- adverse weather conditions;
- our inability to successfully generate business in new geographic markets;
- a reduction in our lower-cost funding sources;
- our inability to adapt to technological changes;
- claims and litigation pertaining to fiduciary responsibility, environmental laws and other matters;
- our inability to retain key employees;
- demands for loans and deposits in our market areas;
- adverse changes in securities markets;
- changes in accounting policies and practices; and
- other unexpected material adverse changes in our operations or earnings.

Further, given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and whether the gradual reopening of businesses will result in a meaningful increase in economic activity. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

- demand for our products and services may decline, making it difficult to grow assets and income;
- if the economy is unable to substantially reopen, and higher levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
- collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
- our allowance for loan losses may increase if borrowers experience financial difficulties, which will adversely affect our net income;
- the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
- a material decrease in net income or a net loss over several quarters could result in an elimination or a decrease in the rate of our quarterly cash dividend;
- our wealth management revenues may decline with continuing market turmoil;
- a worsening of business and economic conditions or in the financial markets could result in an impairment of certain intangible assets, such as goodwill;
- the unanticipated loss or unavailability of key employees due to the outbreak, which could harm our ability to operate our business or execute our business strategy, especially as we may not be successful in finding and integrating suitable successors;
- we may face litigation, regulatory enforcement and reputation risk as a result of our participation in the PPP and the risk that the SBA may not fund some or all PPP loan guaranties;
- our cyber security risks are increased as the result of an increase in the number of employees working remotely; and
- FDIC premiums may increase if the agency experience additional resolution costs.

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

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

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES:** Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2020 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 loan and lease 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.

The provision for loan and lease losses is based upon Management’s evaluation of the adequacy of the allowance, including an assessment of known and inherent risks in the portfolio, giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, classified loans and nonperforming loans, detailed analysis of individual loans for which full collectability may not be assured, the existence and estimated fair value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. Although Management uses the best information available, the level of the allowance for loan and lease 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 loan and lease losses. Such agencies may require the Company to make additional provisions for loan and lease 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 loan and lease losses and allowance for loan and lease losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control.

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

**EXECUTIVE SUMMARY:** The following table presents certain key aspects of our performance for the three months ended September 30, 2021 and 2020.

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

| Results of Operations: | For the Three Months Ended September 30, 2021 | 2020 | Change 2021 vs 2020 |
| --- | ---: | ---: | ---: |
| Net interest income | $35,211 | $32,149 | $3,062 |
| Provision for loan and lease losses | 1,600 | 5,150 | (3,550) |
| Net interest income after provision for loan and lease losses | 33,611 | 26,999 | 6,612 |
| Wealth management fee income (1) | 13,860 | 10,119 | 3,741 |
| Other income (2) | 3,921 | 10,092 | (6,171) |
| Operating expense (3) | 32,185 | 28,461 | 3,724 |
| Income before income tax expense | 19,207 | 18,749 | 458 |
| Income tax expense | 5,036 | 5,202 | (166) |
| Net income | $14,171 | $13,547 | $624 |
| Total revenue (4) | $52,992 | $52,360 | $632 |
| Diluted average shares outstanding | 19,273,831 | 19,132,650 | 141,181 |
| Diluted earnings per share | $0.74 | $0.71 | $0.03 |
| Return on average assets annualized (ROAA) | 0.95% | 0.89% | 0.06% |
| Return on average equity annualized (ROAE) | 10.40 | 10.53 | (0.13) |

(1) The September 2021 quarter included a full quarter of wealth management fee income and expense related to the December hires of the teams from Lucas and Noyes and the July acquisition of Princeton Portfolio Strategies Group (“PPSG”).

(2) The quarter ended September 30, 2020 included a gain on sale of $7.4 million on the sale of $355 million of PPP loans.

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

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

The following table presents certain key aspects of our performance for the nine months ended September 30, 2021 and 2020.

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

| Results of Operations: | For the Nine Months Ended September 30, 2021 | 2020 | Change 2021 vs 2020 |
| --- | ---: | ---: | ---: |
| Net interest income | $100,849 | $95,867 | $4,982 |
| Provision for loan and lease losses (1) | 2,725 | 30,050 | (27,325) |
| Net interest income after provision for loan and lease losses | 98,124 | 65,817 | 32,307 |
| Wealth management fee income (2) | 39,025 | 30,070 | 8,955 |
| Other income (3) | 14,254 | 17,284 | (3,030) |
| Operating expense (4) | 94,463 | 85,710 | 8,753 |
| Income before income tax expense | 56,940 | 27,461 | 29,479 |
| Income tax expense (5) | 15,173 | 4,299 | 10,874 |
| Net income | $41,767 | $23,162 | $18,605 |
| Total revenue (6) | $154,128 | $143,221 | $10,907 |
| Diluted average shares outstanding | 19,390,522 | 19,052,605 | 337,917 |
| Diluted earnings per share | $2.15 | $1.22 | $0.93 |
| Return on average assets annualized (ROAA) | 0.94% | 0.54% | 0.40% |
| Return on average equity annualized (ROAE) | 10.43 | 6.07 | 4.36 |

(1) The 2020 nine months included a provision for loan and lease losses of $30.1 million, primarily due to the environment at that time created by the COVID-19 pandemic.

(2) The 2021 nine months included nine months of wealth management fee income and expense related to the December hires of the teams from Lucas and Noyes and three months of wealth management fee income and expense related to the July acquisition of PPSG.

(3) The 2021 nine months included: a cost of $842,000 related to the termination of interest rate swaps; a $1.4 million gain on loans held at lower of cost or fair value; $722,000 of fee income related to the referral of PPP loans to a third party; and $455,000 of additional BOLI income related to receipt of life insurance proceeds. The 2020 nine months included a $7.4 million gain on the sale of $355 million of PPP loans.

(4) The 2021 nine months included: $1.5 million of severance expense related to certain corporate restructuring within several areas of the Bank; $648,000 of expense related to the redemption of subordinated debt; and $1.4 million related to a swap valuation allowance.

(5) The 2020 nine months included a $3.2 million tax benefit related to the carryback of tax NOLs to prior years when the federal tax rate was 14 percent higher.

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

| Selected Balance Sheet Ratios: | September 30, 2021 | December 31, 2020 | Change 2021 vs 2020 |
| --- | ---: | ---: | ---: |
| Total capital (Tier I + II) to risk-weighted assets | 15.12% | 17.67% | (2.55)% |
| Tier I leverage ratio | 8.56 | 8.53 | 0.03 |
| Loans to deposits | 85.10 | 90.74 | (5.64) |
| Allowance for loan and lease losses to total loans | 1.42 | 1.54 | (0.12) |
| Allowance for loan and lease losses to nonperforming loans | 251.24 | 589.91 | (338.67) |
| Nonperforming loans to total loans | 0.57 | 0.26 | 0.31 |

For the quarter ended September 30, 2021, the Company recorded revenue of $52.99 million, pretax income of $19.21 million, net income of $14.17 million and diluted earnings per share of $0.74, compared to revenue of $52.36 million, pretax income of $18.75 million, net income of $13.55 million and diluted earnings per share of $0.71 for the same three-month period last year. The 2021 quarter included increased net interest income and wealth management income and income from capital markets activities (which includes mortgage banking income, back-to-back swap income, SBA loan income, and corporate advisory fee income), while the 2020 period included a $7.4 million gain on sale of $355 million of PPP loans. The 2021 quarter also included a significantly reduced provision for loan losses when compared to the same quarter last year partially offset by increased operating expenses (due in part to the wealth management acquisitions in December 2020 and July 2021) and a $1.40 million swap valuation allowance). The 2021 quarter included a $1.60 million provision while the 2020 quarter included a $5.15 million provision, which was due to the economic environment at that time created by the COVID-19 pandemic, which led to increased qualitative loss factors when calculating the allowance for loan losses. Fee income generated by capital markets activities totaled $2.06 million for the third quarter of 2021, an increase of $950,000 from $1.11 million for the same period in 2020. Income from these programs are not linear each quarter, as some quarters will be higher than others.

The Company recorded revenue of $154.13 million, pretax income of $56.94 million, net income of $41.77 million and diluted earnings per share of $2.15 for the nine months ended September 30, 2021 compared to revenue of $143.22 million, pretax income of $27.46 million, net income of $23.16 million and diluted earnings per share of $1.22 for the same 2020 period. The nine months ended September 30, 2021 included increased net interest income and wealth management income and a significantly reduced provision for loan and lease losses partially offset by increased operating expenses (due in part to the wealth management acquisitions in December 2020 and July 2021) and a $1.4 million swap valuation allowance. The decrease in noninterest income was driven by a gain on sale of PPP loans during the nine months ended September 30, 2020 of $7.4 million. The nine months ended September 30, 2021 including a loss on a hedging swap termination partially offset by PPP referral income and income from capital markets activities (which includes mortgage banking income, back-to-back swap income, SBA loan income, and corporate advisory fee income). Fee income generated by capital markets activities totaled $7.10 million for the first nine months of 2021, an increase of $2.07 million from $5.02 million for the same period in 2020, despite a decline in loan level back-to-back swap income of $1.60 million. Income from these programs are not linear each quarter, as some quarters will be higher than others. The nine months ended September 30, 2020 included a tax benefit of $3.2 million recorded in the first quarter of 2020 caused by the changes in the treatment of tax NOLs under the provisions of the CARES Act.

**COVID-19 UPDATE:** The COVID-19 pandemic has had a devastating effect on businesses both locally and nationally. In March 2020, Congress passed the CARES Act to provide fast and direct economic assistance to American workers, families and businesses. The CARES Act contains substantial tax and spending provisions including direct financial aid to American families, extensive emergency funding for hospitals and medical providers, and economic stimulus to significant impacted industry sectors. Below are some of the measures the Company has implemented in response to COVID-19.

The Company has an Incident Response Team comprised of senior and departmental leaders that meet frequently to monitor and address the ongoing developments and challenges presented by the COVID-19 pandemic. The following represents responses by Management as a result of COVID-19:

- The Company’s branch offices are open with fully operational lobbies and drive-thru facilities (effective May 2021), ATM access, and on-line banking;
- Management has leveraged technology to support employees that are working remotely; and
- Retail client initiatives have been introduced including:

1\) The Company has approved deferral requests under the CARES Act of approximately $947.0 million of which there are only $13 million deferrals as of September 30, 2021;

2\) Waiver of all late fees for April/May/June 2020; and

3\) The Company continued to utilize the PPP to assist both clients and community organizations with funding needs related to the pandemic during 2021. The Company funded $57 million of PPP loans and referred another $124 million directly to a third party for processing and servicing.

The Company will continue to prudently extend credit to our clients. The Company expects COVID-19 to have an impact on our operations but cannot determine or estimate the ultimate impact at this time.

**CONTRACTUAL OBLIGATIONS:** For a discussion of our contractual obligations, see the information set forth in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations.”

**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, 2020 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Off-Balance Sheet Arrangements.”

### 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 calculated as net interest income as a percent of total interest earning assets on an annualized basis. The Company’s net interest income, spread and margin are affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows and general levels of nonperforming assets.

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

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2021 NII | NIM | Three Months Ended September 30, 2020 NII | NIM |
| --- | ---: | ---: | ---: | ---: |
| NII/NIM excluding the below | $34,635 | 2.56% | $30,327 | 2.45% |
| Prepayment premiums received on loan paydowns | 325 | 0.02% | 104 | 0.01% |
| Effect of maintaining excess interest earning cash | (46) | -0.14% | (266) | -0.24% |
| Effect of PPP loans | 297 | -0.02% | 1,984 | -0.02% |
| NII/NIM as reported | $35,211 | 2.42% | $32,149 | 2.20% |

|  | Nine Months Ended September 30, 2021 NII | NIM | Nine Months Ended September 30, 2020 NII | NIM |
| --- | ---: | ---: | ---: | ---: |
| NII/NIM excluding the below | $97,655 | 2.53% | $91,901 | 2.51% |
| Prepayment premiums received on loan paydowns | 1,530 | 0.03% | 1,005 | 0.02% |
| Effect of maintaining excess interest earning cash | (365) | -0.17% | (1,000) | -0.19% |
| Effect of PPP loans | 2,029 | -0.04% | 3,961 | -0.01% |
| NII/NIM as reported | $100,849 | 2.35% | $95,867 | 2.33% |

Net interest income, on a fully tax-equivalent basis, increased $2.9 million for the third quarter of 2021 to $35.4 million as compared to $32.5 million for the same quarter in 2020. The net interest margin increased 22 basis points to 2.42 percent from 2.20 percent when comparing the three months ended September 30, 2021 and 2020, respectively. The Company recorded net interest income, on a fully tax-equivalent basis, of $101.5 million for the nine months ended September 30, 2021 as compared to $97.2 million for the same 2020 period. The net interest margin was 2.35 percent and 2.33 percent for the nine months ended September 30, 2021 and 2020, respectively, an increase of 2 basis points. As a commercial bank, the Company is asset sensitive with a large portion of its commercial loan portfolio tied to one-month LIBOR. The increase in NIM for the three and nine months ended September 30, 2021 when compared to the same periods in 2020 was due to the Bank strategically lowering its cost of interest-bearing liabilities and a decline in the average balance of lower yielding PPP loans. For the quarter ended September 30, 2021, NIM also benefitted from the use of some of its excess liquidity to purchase investment securities when compared to the same 2020 period.

Net interest income benefitted from interest and fees from PPP loans of $354,000 and $2.4 million for the three and nine months ended September 30, 2021, respectively, as compared to $2.2 million and $3.2 million for the three and nine months ended September 30, 2020, respectively. As of September 30, 2021, the Company had $48.9 million of PPP loans, with net deferred fees of $140,000 that will be amortized to net interest income over the life of the loans, which have a stated maturity of two to five years. However, these loans may be eligible for loan forgiveness by the SBA at an earlier date, which would accelerate the amortization of the net deferred fees.

Future net interest income is expected to be benefitted by the repricing of the Company’s time certificates of deposit (“CDs”). Over the twelve-month period ending September 30, 2022, nearly $400 million of CDs with an average rate of approximately 0.52 percent will mature.

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

*(In thousands)*

|  | For the Three Months Ended September 30, 2021 | September 30, 2020 |
| --- | ---: | ---: |
| Residential mortgage loans originated for portfolio | $36,845 | $32,599 |
| Residential mortgage loans originated for sale | 24,041 | 54,521 |
| Total residential mortgage loans | 60,886 | 87,120 |
| Commercial real estate loans | 14,944 | 1,613 |
| Multifamily properties | 120,716 | 1,500 |
| C&I loans (A) (B) | 143,121 | 118,048 |
| Small business administration | 11,570 | 4,962 |
| Wealth Lines of Credit (A) | 10,020 | 2,000 |
| Total commercial loans | 300,371 | 128,123 |
| Installment loans | 178 | 253 |
| Home equity lines of credit (A) | 2,535 | 4,759 |
| Total loans closed | $363,970 | $220,255 |

*(In thousands)*

|  | For the Nine Months Ended September 30, 2021 | September 30, 2020 |
| --- | ---: | ---: |
| Residential mortgage loans originated for portfolio | $89,742 | $66,057 |
| Residential mortgage loans originated for sale | 95,346 | 110,973 |
| Total residential mortgage loans | 185,088 | 177,030 |
| Commercial real estate loans | 65,550 | 11,219 |
| Multifamily properties | 461,545 | 75,458 |
| C&I loans (A) (B) | 413,547 | 260,250 |
| Small business administration (C) | 86,276 | 614,443 |
| Wealth Lines of Credit (A) | 15,695 | 5,750 |
| Total commercial loans | 1,042,613 | 967,120 |
| Installment loans | 266 | 1,459 |
| Home equity lines of credit (A) | 8,574 | 12,671 |
| Total loans closed | $1,236,541 | $1,158,280 |

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

(B) Includes equipment finance leases and loans.

(C) Includes PPP loans of $57 million and $596 million for the nine months ended September 30, 2021 and 2020, respectively.

At September 30, 2021, December 31, 2020 and September 30, 2020, the Bank had a concentration in commercial real estate (“CRE”) loans as defined by applicable regulatory guidance as follows:

|  | September 30, 2021 | December 31, 2020 | September 30, 2020 |
| --- | ---: | ---: | ---: |
| Multifamily mortgage loans as a percent of total regulatory capital of the Bank | 230% | 188% | 195% |
| Non-owner occupied commercial real estate loans as a percent of total regulatory capital of the Bank | 154 | 168 | 176 |
| Total CRE concentration | 384% | 356% | 371% |

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

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

### Average Balance Sheet

Unaudited

Three Months Ended

*(Dollars in thousands)*

| ASSETS: Interest-earning assets: Investments: | September 30, 2021 Average Balance | Income/ Expense | Annualized Yield | September 30, 2020 Average Balance | Income/ Expense | Annualized Yield |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Taxable (1) | $820,574 | $2,824 | 1.38% | $553,607 | $2,182 | 1.58% |
| Tax-exempt (1) (2) | 6,035 | 64 | 4.24 | 9,127 | 116 | 5.08 |
| Loans (2) (3): |  |  |  |  |  |  |
| Residential mortgages | 503,621 | 3,779 | 3.00 | 529,500 | 4,437 | 3.35 |
| Commercial mortgages | 2,133,259 | 16,114 | 3.02 | 1,929,319 | 15,115 | 3.13 |
| Commercial | 1,826,368 | 16,553 | 3.63 | 2,134,399 | 17,653 | 3.31 |
| Commercial construction | 24,596 | 198 | 3.22 | 4,395 | 55 | 5.01 |
| Installment | 32,219 | 245 | 3.04 | 52,659 | 377 | 2.86 |
| Home equity | 43,182 | 357 | 3.31 | 53,373 | 444 | 3.33 |
| Other | 252 | 5 | 7.94 | 283 | 7 | 9.89 |
| Total loans | 4,563,497 | 37,251 | 3.27 | 4,703,928 | 38,088 | 3.24 |
| Federal funds sold | — | — | — | 102 | — | 0.25 |
| Interest-earning deposits | 413,623 | 142 | 0.14 | 652,832 | 159 | 0.10 |
| Total interest-earning assets | 5,803,729 | 40,281 | 2.78% | 5,919,596 | 40,545 | 2.74% |
| Noninterest-earning assets: |  |  |  |  |  |  |
| Cash and due from banks | 8,592 |  |  | 7,479 |  |  |
| Allowance for loan and lease losses | (64,100) |  |  | (68,110) |  |  |
| Premises and equipment | 23,311 |  |  | 21,511 |  |  |
| Other assets | 201,287 |  |  | 242,017 |  |  |
| Total noninterest-earning assets | 169,090 |  |  | 202,897 |  |  |
| Total assets | $5,972,819 |  |  | $6,122,493 |  |  |
| LIABILITIES: |  |  |  |  |  |  |
| Interest-bearing deposits: |  |  |  |  |  |  |
| Checking | $2,098,827 | $1,177 | 0.22% | $1,828,780 | $1,130 | 0.25% |
| Money markets | 1,257,760 | 683 | 0.22 | 1,235,040 | 920 | 0.30 |
| Savings | 152,759 | 20 | 0.05 | 125,016 | 16 | 0.05 |
| Certificates of deposit - retail | 461,917 | 836 | 0.72 | 642,732 | 2,529 | 1.57 |
| Subtotal interest-bearing deposits | 3,971,263 | 2,716 | 0.27 | 3,831,568 | 4,595 | 0.48 |
| Interest-bearing demand - brokered | 85,000 | 385 | 1.81 | 130,000 | 636 | 1.96 |
| Certificates of deposit - brokered | 33,796 | 266 | 3.15 | 33,742 | 267 | 3.17 |
| Total interest-bearing deposits | 4,090,059 | 3,367 | 0.33 | 3,995,310 | 5,498 | 0.55 |
| FHLB advances and borrowings | 64,332 | 57 | 0.35 | 475,465 | 1,221 | 1.03 |
| Finance lease liabilities | 6,147 | 74 | 4.82 | 7,054 | 84 | 4.76 |
| Subordinated debt | 132,588 | 1,358 | 4.10 | 83,552 | 1,222 | 5.85 |
| Total interest-bearing liabilities | 4,293,126 | 4,856 | 0.45% | 4,561,381 | 8,025 | 0.70% |
| Noninterest-bearing liabilities: |  |  |  |  |  |  |
| Demand deposits | 997,450 |  |  | 872,560 |  |  |
| Accrued expenses and other liabilities | 137,387 |  |  | 173,816 |  |  |
| Total noninterest-bearing liabilities | 1,134,837 |  |  | 1,046,376 |  |  |
| Shareholders’ equity | 544,856 |  |  | 514,736 |  |  |
| Total liabilities and shareholders’ equity | $5,972,819 |  |  | $6,122,493 |  |  |
| Net interest income (tax-equivalent basis) |  | $35,425 |  |  | $32,520 |  |
| Net interest spread |  |  | 2.33% |  |  | 2.04% |
| Net interest margin (4) |  |  | 2.42% |  |  | 2.20% |
| Tax equivalent adjustment |  | $(214) |  |  | $(371) |  |
| Net interest income |  | $35,211 |  |  | $32,149 |  |

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

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

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

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

### Average Balance Sheet

Unaudited

Nine Months Ended

*(Dollars in thousands)*

| ASSETS: Interest-earning assets: Investments: | September 30, 2021 Average Balance | Income/ Expense | Annualized Yield | September 30, 2020 Average Balance | Income/ Expense | Annualized Yield |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Taxable (1) | $822,262 | $8,473 | 1.37% | $467,881 | $6,749 | 1.92% |
| Tax-exempt (1) (2) | 6,961 | 243 | 4.65 | 9,930 | 376 | 5.05 |
| Loans (2) (3): |  |  |  |  |  |  |
| Residential mortgages | 501,276 | 11,559 | 3.07 | 531,563 | 13,510 | 3.39 |
| Commercial mortgages | 1,972,723 | 45,590 | 3.08 | 1,989,256 | 49,745 | 3.33 |
| Commercial | 1,900,231 | 49,992 | 3.51 | 1,977,597 | 54,450 | 3.67 |
| Commercial construction | 20,418 | 516 | 3.37 | 4,440 | 187 | 5.62 |
| Installment | 34,724 | 777 | 2.98 | 53,165 | 1,212 | 3.04 |
| Home equity | 45,672 | 1,133 | 3.31 | 54,627 | 1,512 | 3.69 |
| Other | 239 | 15 | 8.37 | 321 | 23 | 9.55 |
| Total loans | 4,475,283 | 109,582 | 3.26 | 4,610,969 | 120,639 | 3.49 |
| Federal funds sold | 64 | — | 0.13 | 102 | — | 0.25 |
| Interest-earning deposits | 465,287 | 367 | 0.11 | 468,064 | 820 | 0.23 |
| Total interest-earning assets | 5,769,857 | 118,665 | 2.74% | 5,556,946 | 128,584 | 3.09% |
| Noninterest-earning assets: |  |  |  |  |  |  |
| Cash and due from banks | 10,018 |  |  | 6,149 |  |  |
| Allowance for loan and lease losses | (67,592) |  |  | (58,896) |  |  |
| Premises and equipment | 23,087 |  |  | 21,373 |  |  |
| Other assets | 203,344 |  |  | 212,716 |  |  |
| Total noninterest-earning assets | 168,857 |  |  | 181,342 |  |  |
| Total assets | $5,938,714 |  |  | $5,738,288 |  |  |
| LIABILITIES: |  |  |  |  |  |  |
| Interest-bearing deposits: |  |  |  |  |  |  |
| Checking | $1,996,663 | $3,099 | 0.21% | $1,706,558 | $6,219 | 0.49% |
| Money markets | 1,250,933 | 2,204 | 0.23 | 1,211,720 | 5,374 | 0.59 |
| Savings | 140,066 | 55 | 0.05 | 118,291 | 47 | 0.05 |
| Certificates of deposit - retail | 494,255 | 3,333 | 0.90 | 672,308 | 9,370 | 1.86 |
| Subtotal interest-bearing deposits | 3,881,917 | 8,691 | 0.30 | 3,708,877 | 21,010 | 0.76 |
| Interest-bearing demand - brokered | 100,110 | 1,334 | 1.78 | 153,358 | 2,259 | 1.96 |
| Certificates of deposit - brokered | 33,783 | 791 | 3.12 | 33,729 | 794 | 3.14 |
| Total interest-bearing deposits | 4,015,810 | 10,816 | 0.36 | 3,895,964 | 24,063 | 0.82 |
| FHLB advances and borrowings | 138,448 | 448 | 0.43 | 330,324 | 3,360 | 1.36 |
| Finance lease liabilities | 6,376 | 229 | 4.79 | 7,266 | 261 | 4.79 |
| Subordinated debt | 165,053 | 5,650 | 4.56 | 83,496 | 3,667 | 5.86 |
| Total interest-bearing liabilities | 4,325,687 | 17,143 | 0.53% | 4,317,050 | 31,351 | 0.97% |
| Noninterest-bearing liabilities: |  |  |  |  |  |  |
| Demand deposits | 932,088 |  |  | 763,414 |  |  |
| Accrued expenses and other liabilities | 143,045 |  |  | 149,187 |  |  |
| Total noninterest-bearing liabilities | 1,075,133 |  |  | 912,601 |  |  |
| Shareholders’ equity | 533,894 |  |  | 508,637 |  |  |
| Total liabilities and shareholders’ equity | $5,934,714 |  |  | $5,738,288 |  |  |
| Net interest income (tax-equivalent basis) |  | $101,522 |  |  | $97,233 |  |
| Net interest spread |  |  | 2.21% |  |  | 2.12% |
| Net interest margin (4) |  |  | 2.35% |  |  | 2.33% |
| Tax equivalent adjustment |  | $(673) |  |  | $(1,366) |  |
| Net interest income |  | $100,849 |  |  | $95,867 |  |

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

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

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

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

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

| (In Thousands): ASSETS: | For the Three Months Ended September 30, 2021 Difference due to Change In: Volume | Rate | Change In Income/ Expense |
| --- | ---: | ---: | ---: |
| Investments | $822 | $(232) | $590 |
| Loans | (1,237) | 400 | (837) |
| Interest-earning deposits | (71) | 54 | (17) |
| Total interest income | $(486) | $222 | $(264) |
| **LIABILITIES:** |  |  |  |
| Interest-bearing checking | $106 | $(59) | $47 |
| Money market | (21) | (216) | (237) |
| Savings | 4 | — | 4 |
| Certificates of deposit - retail | (575) | (1,118) | (1,693) |
| Certificates of deposit - brokered | — | (1) | (1) |
| Interest bearing demand brokered | (202) | (49) | (251) |
| Borrowed funds | (319) | (845) | (1,164) |
| Capital lease obligation | (10) | — | (10) |
| Subordinated debt | 502 | (366) | 136 |
| Total interest expense | $(515) | $(2,654) | $(3,169) |
| Net interest income | $29 | $2,876 | $2,905 |

| (In Thousands): ASSETS: | For the Nine Months Ended September 30, 2021 Difference due to Change In: Volume | Rate | Change In Income/ Expense |
| --- | ---: | ---: | ---: |
| Investments | $3,524 | $(1,933) | $1,591 |
| Loans | (3,280) | (7,777) | (11,057) |
| Interest-earning deposits | (5) | (448) | (453) |
| Total interest income | $239 | $(10,158) | $(9,919) |
| **LIABILITIES:** |  |  |  |
| Interest-bearing checking | $427 | $(3,547) | $(3,120) |
| Money market | 188 | (3,358) | (3,170) |
| Savings | 8 | — | 8 |
| Certificates of deposit - retail | (2,047) | (3,990) | (6,037) |
| Certificates of deposit - brokered | 1 | (4) | (3) |
| Interest bearing demand brokered | (732) | (193) | (925) |
| Borrowed funds | (2,107) | (805) | (2,912) |
| Capital lease obligation | (31) | (1) | (32) |
| Subordinated debt | 2,797 | (814) | 1,983 |
| Total interest expense | $(1,496) | $(12,712) | $(14,208) |
| Net interest income | $1,735 | $2,554 | $4,289 |

Interest income on interest-earning assets, on a fully tax-equivalent basis, totaled $40.3 million for the third quarter of 2021 compared to $40.5 million for the same period of 2020, reflecting a decrease of $264,000, or less than 1 percent. The decrease for the three months ended September 30, 2021, as compared to the same period in 2020, reflected a decrease in the average balance of interest-earning assets, partially offset by an increase in the average yield on interest-earnings assets. Interest income on interest-earning assets, on a fully tax-equivalent basis, decreased $9.9 million to $118.7 million for the nine months ended September 30, 2021 compared to $128.6 million for the same period of 2020. The decrease in the nine months ended September 30, 2021, as compared to the same period in 2020, reflected a decrease in the average yield on interest-earnings assets, partially offset by an increase in the average balance of interest-earning assets.

Average interest-earning assets totaled $5.80 billion for the third quarter of 2021, a decrease of $115.9 million, or 2 percent, from the same period of 2020. The decrease in the average balance of interest-earning assets for the three months ended September 30, 2021 reflected a decline in the average balance of loans and interest-earning deposits, partially offset by an increase in the average balance of investment securities for the three months ended September 30, 2021, when compared to the same period in 2020. Average interest-earning assets increased by $212.9 million, or 4 percent, to $5.77 billion for the nine months ended September 30, 2021, when compared to the same period in 2020. The increase in the average balance of interest-earning assets for the nine months ended September 30, 2021 reflected an increase in the average balance of investment securities, partially offset by a decline in the average balances of loans and interest-earning deposits for the nine months ended September 30, 2021, when compared to the same period in 2020. The average balance of the commercial mortgage portfolio increased $203.9 million to $2.13 billion for the three months ended September 30, 2021, when compared to $1.93 billion for the same period in 2020. The increased multifamily production helped to offset loan portfolio run-off and utilize excess liquidity. The average balance of the commercial mortgage portfolio was $1.97 billion for the nine months ended September 30, 2021 compared to $1.99 billion for the same period in 2020 reflecting a decrease of $16.5 million. The average balance of the commercial loan portfolio declined by $308.0 million to $1.83 billion for the three months ended September 30, 2021, when compared to $2.13 billion for the three months ended September 30, 2020, primarily due to the forgiveness and sale of PPP loans in 2020 and commercial loan paydowns during the first nine months of 2021. Total PPP loans declined $153.3 million to $48.7 million at September 30, 2021 from $202.0 million at September 30, 2020. The average balance of the commercial loan portfolio decreased $77.4 million to $1.90 billion for the first nine months of 2021, from $1.98 billion for the nine months ended September 30, 2020. The average balance of the residential mortgage portfolio decreased by $25.9 million, or 5 percent, to $503.6 million during the three months ended September 30, 2021 from the same period in 2020. For the nine months ended September 30, 2021 the residential mortgage portfolio declined $30.3 million to $501.3 million from $531.6 million for the same period in 2020. The decline in the residential portfolio for the three and nine months ended September 30, 2021 was due to the sale of fixed-rate residential mortgage loans as part of the Company’s balance sheet management.

The average balance of investment securities totaled $826.6 million for the third quarter of 2021 compared to $562.7 million for the same quarter of 2020, reflecting an increase of $263.9 million, or 47 percent. The average balance of investment securities totaled $829.2 million for the nine months ended September 30, 2021 compared to $477.8 million for the same period of 2020, reflecting an increase of $351.4 million, or 74 percent. The increase in the average balance of investment securities for the three and nine months ended September 30, 2021 was due to the purchase of securities to maintain the size of the portfolio in anticipation of maturities and to utilize excess liquidity.

The average balance of interest-earning deposits totaled $413.6 million for the quarter ended September 30, 2021 when compared to $652.8 million for the same period in 2020, reflecting a decrease of $239.2 million or 37 percent. The decrease in the average balance of interest-earning deposits for the three months ended September 30, 2021 was primarily due the Company using excess balance sheet liquidity to fund multifamily originations and investment security purchases. Interest-earning deposits declined slightly to $465.3 million for the nine months ended September 30, 2021 compared to $468.1 million for the same 2020 period.

For the third quarters of 2021 and 2020, the average yields earned on interest-earning assets were 2.78 percent and 2.74 percent, respectively, an increase of 4 basis points. The increase was primarily due to the decrease in lower-yielding interest-earning deposits and investments for the three-month period ended September 30, 2021 period. The increase in yield was also attributable to the lower average balance of PPP loans, which primarily yield one percent for the third quarter of 2021, as compared to the prior period. For the nine months ended September 30, 2021 and 2020, the average yields earned on interest-earning assets were 2.74 percent and 3.09 percent, respectively, a decrease of 35 basis points. The decrease in average yields on interest-earning assets for the nine-month period was due to a declining rate environment, which resulted in a decrease in the average yield on our loan portfolio of 23 basis points to 3.26 percent. The average yield on interest-earning assets for the nine months ended September 30, 2021 was also affected by elevated levels of interest-bearing cash and investment securities. One-month LIBOR has declined by approximately 150 basis points from the beginning of 2020. The Federal Open Market Committee also reduced the target Federal Funds rate to 0 percent to 0.25 percent in March 2020 due to the economic disruption caused by COVID-19. With the transformation to a commercial bank balance sheet and business model, the Company’s interest rate sensitivity models indicate the Company is asset sensitive as of September 30, 2021, and that net interest income would improve in a rising rate environment but decline in a falling rate environment.

For the third quarter of 2021, the average balance of interest-bearing deposits was $4.09 billion, an increase of $94.7 million, or 2 percent, from $4.00 billion for the same period of 2020. The average balance of interest-bearing deposits for the nine months ended September 30, 2021 increased $119.8 million to $4.02 billion when compared to $3.90 billion for the same period in 2020. The growth in customer deposits (excluding brokered CDs and brokered interest-bearing demand deposits, but including reciprocal funds discussed below) was due to an increase in retail deposits from our branch network; an increase in term money market deposits to fund multifamily loan production; an increase in interest-bearing checking deposits as maturing CDs shifted into these accounts; a focus on providing high-touch client service; new deposit relationships related to PPP; and a full array of treasury management products that support core deposit growth. The growth was partially offset by a decline of $45.0 million and $53.2 million in the average balance of brokered deposits for the three and nine months ended September 30, 2021, respectively, when compared to the same 2020 periods.

Average rates paid on total interest-bearing deposits were 0.33 percent and 0.55 percent for the third quarters of 2021 and 2020, respectively, a decrease of 22 basis points. Average rates paid on total interest-bearing deposits were 0.36 percent and 0.82 percent for the nine months ended September 30, 2021 and 2020, respectively, a decrease of 46 basis points. The decrease in the average rate paid on deposits was principally due to repricing of our deposit base to align with the Federal Reserve rate decreases and due to a larger proportion of our deposit portfolio consisting of core deposits with a decreasing amount of certificates of deposit.

For the three months ended September 30, 2021, the average balance of borrowings was $64.3 million, a decrease of $411.1 million from $475.5 million, as compared to the same period in 2020. The average rate paid on borrowings was 0.35 percent for the quarter ended September 30, 2021 as compared to 1.03 percent for the same period in 2020. For the nine months ended September 30, 2021, the average balance of borrowings was $138.4 million, a decrease of $191.9 million from $330.3 million for the same period in 2020. The average rate paid on borrowings was 0.43 percent for the nine months ended September 30, 2021 as compared to 1.36 percent for the same period in 2020. The decrease in borrowings was principally due to the Company’s participation in the PPPLF which decreased as more PPP loans were forgiven in the second quarter of 2021 and by the Company’s prepayment of $105.0 million of FHLB advances with a weighted-average rate of 3.20 percent during the fourth quarter of 2020. The average rate paid on borrowings was lower for the three and nine months ended September 30, 2021 due to the prepayment of the FHLB advances with a weighted-average rate of 3.20 percent.

The Company is a participant in the Reich & Tang Demand Deposit Marketplace (“DDM”) program and the Promontory Program. The Company uses these deposit sweep services to place customer funds into interest-bearing demand (checking) accounts issued by other participating banks. Customer funds are placed at one or more participating banks to ensure that each deposit customer is eligible for the full amount of FDIC insurance. As a program participant, the Company receives reciprocal amounts of deposits from other participating banks. Such reciprocal deposit balances are included in the Company’s interest-bearing checking balances. The average balance of reciprocal deposits was $711.6 million and $725.4 million for the three and nine months ended September 30, 2021, respectively, compared to $663.6 million and $596.3 million for the same three- and nine-month periods ended September 30, 2020, respectively.

In June 2021, the Company redeemed $50.0 million of subordinated debt bearing interest at an annual rate of 6.0 percent issued in June 2016 that was set to re-price to approximately 5.0 percent. In December 2020, the Company issued $100.0 million of subordinated debt ($98.2 million net of issuance costs) bearing interest at an annual rate of 3.50 percent for the first five years, and thereafter at an adjustable rate until maturity in December 2025 or earlier redemption. In December 2017, the Company issued $35.0 million of subordinated debt ($34.1 million net of issuance costs) bearing interest at an annual rate of 4.75 percent for the first five years, and thereafter at an adjustable rate until maturity in December 2027 or earlier redemption.

**INVESTMENT SECURITIES AVAILABLE FOR SALE:** 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. These securities are carried at estimated fair value, and unrealized changes in fair value are recognized as a separate component of shareholders’ equity, net of income taxes. Realized gains and losses are recognized in income at the time the securities are sold. Equity securities are carried at fair value with unrealized gains and losses recorded in noninterest income.

At September 30, 2021, the Company had investment securities available for sale with a fair value of $843.8 million compared with $622.7 million at December 31, 2020. The increase was due to purchases of residential mortgage-backed securities and U.S. government-sponsored agencies with excess liquidity as deposits exceeded loan growth. A net unrealized loss (net of income tax) of $5.2 million and a net unrealized gain (net of income tax) of $5.5 million were included in shareholders’ equity at September 30, 2021 and December 31, 2020, respectively.

The Company has one equity security (a CRA investment security) with a fair value of $14.8 million at September 30, 2021 compared with a fair value of $15.1 million at December 31, 2020, with changes in fair value recognized in the Consolidated Statements of Income. The Company recorded a $70,000 unrealized loss and $293,000 unrealized loss on the Consolidated Statements of Income for the three and nine months ended September 30, 2021, respectively, as compared to an unrealized gain of $323,000 for the nine months ended September 30, 2020. There was no change in the unrealized gain/(loss) on our equity security during the three months ended September 30, 2020.

The carrying value of investment securities available for sale as of September 30, 2021 and December 31, 2020 are shown below:

*(In thousands)*

|  | September 30, 2021 | December 31, 2020 |
| --- | ---: | ---: |
| U.S. treasuries | $— | $2,613 |
| U.S. government-sponsored agencies | 274,433 | 83,771 |
| Mortgage-backed securities-residential (principally U.S. government-sponsored entities) | 515,131 | 476,058 |
| SBA pool securities | 42,930 | 49,129 |
| State and political subdivisions | 5,750 | 8,089 |
| Corporate bond | 5,535 | 3,029 |
| Total | $843,779 | $622,689 |

The following table presents the contractual maturities and yields of debt securities available for sale, stated at fair value, as of September 30, 2021:

|  |  | After 1 But | After 5 But | After |  |
| --- | ---: | ---: | ---: | ---: | ---: |
|  | **Within** | **Within** | **Within** | **10** |  |
| **(Dollars in thousands)** | **1 Year** | **5 Years** | **10 Years** | **Years** | **Total** |
| U.S. government-sponsored agencies | $— | $5,625 | $122,915 | $145,893 | $274,433 |
|  | — | 1.00% | 1.32% | 1.69% | 1.51% |
| Mortgage-backed securities-residential (1) | $25,155 | $20,524 | $37,484 | $431,968 | $515,131 |
|  | 1.25% | 2.37% | 1.72% | 1.38% | 1.44% |
| SBA pool securities | $— | $— | $7,212 | $35,718 | $42,930 |
|  | — | — | 1.92% | 1.22% | 1.33% |
| State and political subdivisions (2) | $3,067 | $2,683 | $— | $— | $5,750 |
|  | 2.54% | 2.10% | — | — | 2.34% |
| Corporate bond | $— | $— | $5,535 | $— | $5,535 |
|  | — | — | 4.23% | — | 4.23% |
| **Total** | $28,222 | $28,832 | $173,146 | $613,579 | $843,779 |
|  | 1.39% | 2.07% | 1.52% | 1.45% | 1.48% |

(1) Shown using stated final maturity.

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

Federal funds sold and interest-earning deposits are an additional part of the Company’s liquidity and interest rate risk management strategies. The combined average balance of these investments during the three months ended September 30, 2021 was $413.6 million compared to $652.8 million for the quarter ended September 30, 2020. The higher level of federal funds sold and interest-earning deposits for both periods represented excess cash as deposit growth and cash from maturing securities exceeded loan growth.

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

*(In thousands)*

|  | For the Three Months Ended September 30, 2021 | 2020 | Change 2021 vs 2020 |
| --- | ---: | ---: | ---: |
| Service charges and fees | $959 | $785 | $174 |
| Bank owned life insurance | 311 | 314 | (3) |
| Gain on sale of loans (mortgage banking) | 408 | 954 | (546) |
| Gain on loans held for sale at lower of cost or fair value | — | 7,429 | (7,429) |
| Fee income related to loan level, back-to-back swaps | — | — | — |
| Gain on sale of SBA loans | 1,569 | 79 | 1,490 |
| Corporate advisory fee income | 84 | 75 | 9 |
| Other income | 660 | 456 | 204 |
| Securities gains, net | (70) | — | (70) |
| Total other income (excluding wealth management income) | $3,921 | $10,092 | $(6,171) |

*(In thousands)*

|  | For the Nine Months Ended September 30, 2021 | 2020 | Change 2021 vs 2020 |
| --- | ---: | ---: | ---: |
| Service charges and fees | $2,701 | $2,296 | $405 |
| Bank owned life insurance | 1,388 | 960 | 428 |
| Gain on sale of loans (mortgage banking) | 1,842 | 1,796 | 46 |
| Gain/(loss) on loans held for sale at lower of cost or fair value | 1,407 | 7,426 | (6,019) |
| Fee income related to loan level, back-to-back swaps | — | 1,620 | (1,620) |
| Gain on sale of SBA loans | 3,950 | 1,391 | 2,559 |
| Corporate advisory fee income | 1,303 | 215 | 1,088 |
| Loss on swap termination | (842) | — | (842) |
| Other income | 2,798 | 1,257 | 1,541 |
| Securities gains, net | (293) | 323 | (616) |
| Total other income (excluding wealth management income) | $14,254 | $17,284 | $(3,030) |

The Company recorded total other income, excluding wealth management fee income, of $3.9 million for the third quarter of 2021, reflecting a decrease of $6.2 million, or 61 percent, compared to the same period in 2020. For the nine months ended September 30, 2021, the Company recorded total other income, excluding wealth management fee income, of $14.3 million compared to $17.3 million from the same 2020 period reflecting a decrease of $3.0 million or 18 percent. The three and nine months ended September 30, 2021 were principally lower due to the three- and nine-month periods in 2020 due to a $7.4 million gain on the sale of $355 million of PPP loans in 2020.

For the third quarter of 2021, income from the sale of newly originated residential mortgage loans was $408,000 compared to $954,000 for the same quarter in 2020. Income from the sale of newly originated residential mortgage loans was $1.8 million for both the nine months ended September 30, 2021 and 2020, respectively. This decrease for the three months ended September 30, 2021 was the result of the decreased volume of residential mortgage loans originated for sale due to a slowdown in refinancing and home purchase activity during the third quarter of 2021.

For the three and nine months ended September 30, 2021 the Company did not record any loan level, back-to-back swap income compared to $1.6 million for the nine months ended September 30, 2020. The program provides a borrower with a degree of interest rate protection on a variable rate loan, while still providing an adjustable rate to the Company, thus helping to manage the Company’s interest rate risk, while contributing to income. The Company expects back-to-back swap activity will continue to be minimal in the current rate environment.

The Company provides loans that are partially guaranteed by the SBA, for the purposes of providing working capital and/or financing the purchase of equipment, inventory or commercial real estate that could be used for start-up business. All SBA loans are underwritten and documented as prescribed by the SBA. The Company generally sells the guaranteed portion of the SBA loans in the secondary market, with the non-guaranteed portion of SBA loans held in the loan portfolio. The third quarter of 2021 included $1.6 million of gains on sales of SBA loans as compared to $79,000 for the same quarter in 2020. The nine months ended September 30, 2021 included $4.0 million of gains on sale of SBA loans as compared to $1.4 million for the same period in 2020. The three- and nine-month September 2021 periods benefitted by certain changes to SBA lending requirements, which included raising the SBA loan guaranty from 75 percent to 90 percent and eliminated the guaranty fee to both borrowers and lenders through September 30, 2021.

The Company recorded corporate advisory fee income of $84,000 and $1.3 million for the three and nine months ended September 30, 2021, respectively, compared to $75,000 and $215,000 for the same periods in 2020. The nine-month 2021 period included the Company’s first major corporate advisory/investment banking acquisition transaction. These transactions tend to be larger and take longer to complete.

Income from the back-to-back swap, SBA programs, and corporate advisory fee income are dependent on volume, and thus are not linear from quarter to quarter, as some quarters will be higher than others.

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

During the nine months ended September 30, 2021, the Company recorded a gain on sale of $1.1 million for the sale of $57 million of PPP loans to a third party to create additional capacity to process our strong loan pipeline.

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

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

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

The remainder of the increase for the three and nine months ended September 30, 2021 when compared to the same 2020 period was primarily due to an increase in commercial lending fees primarily unused credit line fees, loan servicing income and letter of credit fees.

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

*(In thousands)*

|  | For the Three Months Ended September 30, 2021 | 2020 | Change 2021 vs 2020 |
| --- | ---: | ---: | ---: |
| Compensation and employee benefits | $19,859 | $19,202 | $657 |
| Premises and equipment | 4,459 | 4,109 | 350 |
| FDIC assessment | 555 | 605 | (50) |
| Other Operating Expenses: |  |  |  |
| Professional and legal fees | 1,565 | 1,079 | 486 |
| Telephone | 342 | 370 | (28) |
| Advertising | 386 | 226 | 160 |
| Amortization of intangible assets | 431 | 321 | 110 |
| Swap valuation allowance | 1,350 | — | 1,350 |
| Other | 3,238 | 2,549 | 689 |
| Total operating expenses | $32,185 | $28,461 | $3,724 |

59

*(In thousands)*

|  | For the Nine Months Ended September 30, 2021 | 2020 | Change 2021 vs 2020 |
| --- | ---: | ---: | ---: |
| Compensation and employee benefits | $61,759 | $57,614 | $4,145 |
| Premises and equipment | 12,646 | 12,188 | 458 |
| FDIC assessment | 1,669 | 1,310 | 359 |
| Other Operating Expenses: |  |  |  |
| Professional and legal fees | 4,007 | 3,095 | 912 |
| Telephone | 988 | 1,089 | (101) |
| Advertising | 1,004 | 1,294 | (290) |
| Amortization of intangible assets | 1,167 | 966 | 201 |
| Branch restructure | 228 | 278 | (50) |
| Write-off of subordinated debt costs | 648 | — | 648 |
| Swap valuation allowance | 1,350 | — | 1,350 |
| Other | 8,997 | 7,876 | 1,121 |
| Total operating expenses | $94,463 | $85,710 | $8,753 |

Increased operating expenses in the three- and nine-month periods ended September 30, 2021 was principally attributable to: swap valuation allowance of $1.4 million, expenses related to the Lucas and Noyes team lift outs completed in December 2020, expenses related to the acquisition of PPSG completed in July 2021, hiring in line with the Company’s strategic plan, and normal salary increases, which were partially offset by decreased advertising expense for the nine month 2021 period due to strategically increased spending in 2020 related to the PPP program.

**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, at private banking locations in Morristown, New Providence, Princeton, Red Bank, Summit and Teaneck, New Jersey and at the Bank’s subsidiaries, PGB Trust & Investments of Delaware, in Greenville, Delaware and Murphy Capital, in Bedminster, New Jersey.

The market value of the assets under management and/or administration (“AUM/AUA”) of Peapack Private was $10.3 billion at September 30, 2021, reflecting an 17 percent increase from $8.8 billion at December 31, 2020 and an increase of 36 percent from $7.6 billion at September 30, 2020. Effective December 18, 2020, the Bank completed the hires of the teams from Lucas, based in Red Bank, New Jersey, and from Noyes, based in New Vernon, New Jersey, which combined contributed approximately $400 million of AUM/AUA at the time of acquisition. Effective July 1, 2021, the Bank closed on the acquisition of Princeton Portfolio Strategies Group (“PPSG”), a registered investment advisor headquartered in Princeton, New Jersey, which contributed approximately $520 million of AUM/AUA at the time of acquisition.

In the September 2021 quarter, Peapack Private generated $13.9 million in fee income compared to $10.1 million for the September 2020 quarter, reflecting a 37 percent increase. For the nine months ended September 30, 2021, Peapack Private generated $39.0 million in fee income compared to $30.1 million in fee income for the same period in 2020, reflecting a 30 percent increase. The growth in fee income was due to several factors, including the acquisitions noted above, new business, and positive market performance, partially offset by normal levels of disbursements and outflows.

Operating expenses relative to Peapack Private reflected increases due to overall growth in the business, new hires and acquisitions when comparing both the three and nine months ended September 30, 2021 to the same periods for 2020. 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 Division and Management believes it will continue to do so as the Company grows organically and/or by acquisition. Management believes that the Bank generates adequate liquidity to support the expenses of Peapack Private should it be necessary.

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

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

*(Dollars in thousands)*

|  | As of September 30, 2021 | June 30, 2021 | March 31, 2021 | December 31, 2020 | September 30, 2020 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Loans past due 90 days or more and still accruing | $— | $— | $— | $— | $— |
| Nonaccrual loans (1) | 25,925 | 5,962 | 11,767 | 11,410 | 8,611 |
| Other real estate owned | — | — | 50 | 50 | 50 |
| Total nonperforming assets | $25,925 | $5,962 | $11,817 | $11,460 | $8,661 |
| Performing TDRs | $416 | $190 | $197 | $201 | $2,278 |
| Loans past due 30 through 89 days and still accruing (2)(3) | $1,193 | $1,678 | $1,622 | $5,053 | $6,609 |
| Loans subject to special mention | $115,935 | $148,601 | $166,013 | $162,103 | $129,700 |
| Classified loans (1) | $51,937 | $11,178 | $25,714 | $37,771 | $41,263 |
| Impaired loans (1) | $26,341 | $6,498 | $11,964 | $16,204 | $15,514 |
| Nonperforming loans as a % of total loans (4) | 0.57% | 0.13% | 0.27% | 0.26% | 0.19% |
| Nonperforming assets as a % of total assets (4) | 0.42% | 0.10% | 0.20% | 0.19% | 0.15% |
| Nonperforming assets as a % of total loans plus other real estate owned (4) | 0.57% | 0.13% | 0.27% | 0.26% | 0.19% |

(1) Excludes one commercial loan held for sale of $5.6 million at September 30, 2021, June 30, 2021 and March 31, 2021. Excludes residential and commercial loans held for sale of $8.5 million at December 31, 2020. Excludes one commercial loan held for sale of $10.0 million at September 30, 2020. Includes one impaired commercial real estate loan with a balance of $19.9 million at September 30, 2021.

(2) Excludes a residential loan held for sale of $93,000 at December 31, 2020.

(3) December 31, 2020 includes $1.3 million of residential loans that are classified as delinquent due to an escrow payment shortage due to a recent change in escrow payment requirement.

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

**PROVISION FOR LOAN AND LEASE LOSSES:** The provision for loan and lease losses was $1.6 million and $5.2 million for the third quarters of 2021 and 2020, respectively. For the nine months ended September 30, 2021 and 2020, the provision for loan losses was $2.7 million and $30.1 million, respectively. The decreased provision for loan and lease losses for both the three and nine months ended September 30, 2021 when compared to the three and nine months ended September 30, 2020 reflect the reduced qualitative factors when calculating the allowance for loan losses due to the improvement in the unemployment rate and a decrease in loan deferrals entered into during the COVID-19 pandemic from the prior year (declined from $828 million at September 30, 2020 to $33 million at September 30, 2021). The provision for loan losses for the third quarter of 2021 also reflected loan growth of $41.6 million, excluding PPP loans, and a specific reserve of $7.1 million on a $19.9 million commercial real estate loan, which were partially offset by the decline in qualitative factors related to loan deferrals. The Company’s provision for loan and lease losses also reflects the Company’s assessment of asset quality metrics, net charge-offs/recoveries, and the composition of the loan portfolio.

The allowance for loan and lease losses was $65.1 million as of September 30, 2021, compared to $67.3 million at December 31, 2020. As a percentage of loans, the allowance for loan and lease losses was 1.42 percent and 1.54 percent at September 30, 2021 and at December 31, 2020, respectively. The specific reserves recorded on impaired loans were $7.2 million at September 30, 2021 compared to $2.7 million as of December 31, 2020. Total impaired loans were $26.3 million and $16.2 million as of September 30, 2021 and December 31, 2020, respectively. The general component of the allowance decreased from $64.6 million at December 31, 2020 to $57.9 million at September 30, 2021.

A summary of the allowance for loan and lease losses for the quarterly periods indicated follows:

*(Dollars in thousands)*

| Allowance for loan and lease losses: | September 30, 2021 | June 30, 2021 | March 31, 2021 | December 31, 2020 | September 30, 2020 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Beginning of period | $63,505 | $67,536 | $67,309 | $66,145 | $66,065 |
| Provision for loan and lease losses | 1,600 | 900 | 225 | 2,350 | 5,150 |
| Recoveries/(charge-offs), net | 28 | (4,931) | 2 | (1,186) | (5,070) |
| End of period | $65,133 | $63,505 | $67,536 | $67,309 | $66,145 |
| Allowance for loan and lease losses as a % of total loans (A) | 1.42% | 1.39% | 1.54% | 1.54% | 1.49% |
| General allowance for loan and lease losses as a % of total loans (A) | 1.27% | 1.39% | 1.47% | 1.48% | 1.49% |
| Allowance for loan and lease losses as a % of non-performing loans | 251.24% | 1065.16% | 573.94% | 589.91% | 768.15% |

(A) The September 30, 2020, December 31, 2020, March 31, 2021, June 30, 2021 and September 30, 2021 ALLL coverage ratios include PPP loans of $202.0 million, $195.6 million, $186.9 million, $83.8 million and $48.7 million, respectively, in total loans.

**INCOME TAXES:** Income tax expense for the quarter ended September 30, 2021 was $5.0 million as compared to $5.2 million for the same period in 2020. During the nine months ended September 30, 2021 and 2020, the Company recorded income tax expense of $15.2 million and $4.3 million, respectively.

The effective tax rate for the three months ended September 30, 2021 was 26.22 percent compared to 27.75 percent for the same quarter in 2020.

The effective tax rate for the nine months ended September 30, 2021 was 26.65 percent compared to 15.65 percent for the same 2020 period. During the first quarter of 2020, the Company recorded a $3.34 million tax benefit, principally due to a $3.2 million Federal income tax benefit that resulted from a tax NOL carryback. The Company had a $23 million operating loss for tax purposes in 2018 (when the Federal tax rate was 21 percent) resulting from accelerated tax depreciation. Under the CARES Act, the Company was allowed to carry this NOL back to a period when the federal tax rate was 35 percent, generating a permanent tax benefit.

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

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

Capital was benefitted by net income of $41.8 million for the nine months ended September 30, 2021, which was partially offset by the purchase of shares through the Company’s stock repurchase program and a change in the unrealized loss on securities, net of tax of $10.8 million. The Company repurchased 619,815 shares, at an average price of $31.33, for a total cost of $19.4 million during the nine months ended September 30, 2021.

The Company employs quarterly capital stress testing – adverse case and severely adverse case. In the most recent completed stress test on June 30, 2021, under severely adverse case, and no growth scenarios, the Bank remains well capitalized over a two-year stress period. With a Pandemic stress overlay, the Bank still remains well capitalized over the two-year stress period.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Total, Common Equity Tier 1 and Tier 1 capital (each as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). At September 30, 2021 and December 31, 2020, 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. The Company’s capital ratios were not affected by its participation in the PPP. The Company pledged its PPP loans as collateral and utilized funding provided by the FRB’s PPPLF. PPP loans funded by the PPPLF are risk-weighted at 0 percent for regulatory risk-based capital ratios and are excluded from average assets in the calculation of the regulatory leverage ratio.

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

As a result of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies were required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies set the minimum capital for the Community Bank Leverage Ratio (“CBLR”) at 9 percent, effective January 1, 2020. Under the CARES Act, the Community Bank Leverage Ratio was temporarily lowered to 8 percent. The Bank did not opt into the CBLR and will continue to comply with the requirements under Basel III. The Bank’s leverage ratio was 10.15 percent at September 30, 2021.

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

*(Dollars in thousands)*

| As of September 30, 2021: | Actual Amount | Ratio | To Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio | For Capital Adequacy Purposes Amount | Ratio | For Capital Adequacy Purposes Including Capital Conservation Buffer (A) Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Total capital (to risk-weighted assets) | $651,841 | 14.26% | $457,054 | 10.00% | $365,643 | 8.00% | $479,907 | 10.50% |
| Tier I capital (to risk-weighted assets) | 594,610 | 13.01 | 365,643 | 8.00 | 274,232 | 6.00 | 388,496 | 8.50 |
| Common equity tier I (to risk-weighted assets) | 594,581 | 13.01 | 297,085 | 6.50 | 205,674 | 4.50 | 319,938 | 7.00 |
| Tier I capital (to average assets) | 594,610 | 10.15 | 292,879 | 5.00 | 234,303 | 4.00 | 234,303 | 4.00 |
| As of December 31, 2020: |  |  |  |  |  |  |  |  |
| Total capital (to risk-weighted assets) | $600,478 | 14.81% | $405,587 | 10.00% | $324,469 | 8.00% | $425,866 | 10.50% |
| Tier I capital (to risk-weighted assets) | 549,575 | 13.55 | 324,469 | 8.00 | 243,352 | 6.00 | 344,749 | 8.50 |
| Common equity tier I (to risk-weighted assets) | 549,540 | 13.55 | 263,631 | 6.50 | 182,514 | 4.50 | 283,911 | 7.00 |
| Tier I capital (to average assets) | 549,575 | 9.71 | 283,083 | 5.00 | 226,466 | 4.00 | 226,466 | 4.00 |

(A) See footnote on following table

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

*(Dollars in thousands)*

| As of September 30, 2021: | Actual Amount | Ratio | To Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio | For Capital Adequacy Purposes Amount | Ratio | For Capital Adequacy Purposes Including Capital Conservation Buffer (A) Amount | Ratio |
| --- | ---: | ---: | --- | --- | ---: | ---: | ---: | ---: |
| Total capital (to risk-weighted assets) | $691,044 | 15.12% | N/A | N/A | $365,617 | 8.00% | $479,872 | 10.50% |
| Tier I capital (to risk-weighted assets) | 501,188 | 10.97 | N/A | N/A | 274,213 | 6.00 | 388,468 | 8.50 |
| Common equity tier I (to risk-weighted assets) | 501,159 | 10.97 | N/A | N/A | 205,660 | 4.50 | 319,915 | 7.00 |
| Tier I capital (to average assets) | 501,188 | 8.56 | N/A | N/A | 234,284 | 4.00 | 234,284 | 4.00 |
| As of December 31, 2020: |  |  |  |  |  |  |  |  |
| Total capital (to risk-weighted assets) | $716,210 | 17.67% | N/A | N/A | $324,322 | 8.00% | $425,673 | 10.50% |
| Tier I capital (to risk-weighted assets) | 483,535 | 11.93 | N/A | N/A | 243,242 | 6.00 | 344,592 | 8.50 |
| Common equity tier I (to risk-weighted assets) | 483,500 | 11.93 | N/A | N/A | 182,431 | 4.50 | 283,782 | 7.00 |
| Tier I capital (to average assets) | 483,535 | 8.53 | N/A | N/A | 226,624 | 4.00 | 226,624 | 4.00 |

(A) The Basel Rules require the Company and the Bank to maintain a 2.5% “capital conservation buffer” on top of the minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of (i) CET1 to risk-weighted assets, (ii) Tier 1 capital to risk-weighted assets or (iii) total capital to risk-weighted assets above the respective minimum but below the capital conservation buffer face constraints on dividends, equity repurchases and discretionary bonus payments to executive officers based on the amount of the shortfall.

The Company’s regulatory total risk-based capital ratio was benefitted by the $48.7 million (net) subordinated debt issuance that closed in June 2016. At that time, the Company down-streamed approximately $40.0 million of proceeds to the Bank as capital, benefitting the Bank’s regulatory capital ratios.

On December 12, 2017, the Company issued $35.0 million in aggregate principal amount of fixed-to-floating subordinated notes due December 15, 2027. The Company down-streamed approximately $29.1 million of those proceeds to the Bank as capital.

In addition, in December 2020, the Company issued $100.0 million in aggregate principal amount of fixed-to-floating subordinated notes due December 22, 2030. The Company may use the proceeds from the issuance of the 2020 Notes for stock repurchases and acquisitions of wealth management firms, as well as other general corporate purposes. During the second quarter of 2021, the Company used a portion of the proceeds from the December 2020 subordinated debt issuance to redeem the $50.0 million June 2016 issuance. The remaining net costs of $648,000 were written-off during the quarter ended June 30, 2021.

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, which up to January 30, 2019 were purchased at a 3 percent discount to market for plan participants. On January 30, 2019, the Company filed a Registration Statement on Form S-3 eliminating the 3 percent discount to market price. 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, 2021 were in the open market.

On October 27, 2021, the Board of Directors declared a regular cash dividend of $0.05 per share payable on November 26, 2021 to shareholders of record on November 10, 2021.

Management believes the Company’s capital position and capital ratios are adequate. Further, Management believes the Company has sufficient capital to support its planned balance sheet 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 $616.2 million at September 30, 2021. In addition, the Company had $843.8 million in securities designated as available for sale at September 30, 2021. These securities can be sold, or used as collateral for borrowings, in response to liquidity concerns. Securities available for sale with a fair value of $758.5 million as of September 30, 2021 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.

The Company approved loans of approximately $650 million under the PPP and have a balance of $48.7 million at September 30, 2021. The Federal Reserve has supplied a source of liquidity for the PPP to participating financial institutions through the PPPLF, which extends credit to eligible financial institutions, at a rate of 0.35 percent, that originate PPP loans, taking the loans as collateral at face value. The Company utilized this facility to fund its 2020 PPP loan originations.

As of September 30, 2021, the Company had approximately $1.9 billion of secured funding available from the Federal Home Loan Bank. Additionally, the Company had $1.1 billion of secured funding available from the Federal Reserve Discount Window, none of which was drawn.

Brokered interest-bearing demand (“overnight”) deposits were $85.0 million at September 30, 2021. The interest rate paid on these deposits allows the Bank to fund asset growth at attractive rates and engage in interest rate swaps to hedge its asset-liability interest rate risk. The Company ensures ample available collateralized liquidity as a backup to these short-term brokered deposits. As of September 30, 2021, the Company had transacted pay fixed, receive floating interest rate swaps totaling $230.0 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 created by the COVID-19 pandemic.

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

## Market risk

As filed, 6,801 characters.

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

ALCO is generally authorized to manage interest rate risk through the management of capital, cash flows and duration of assets and liabilities, including sales and purchases of assets, as well as additions of wholesale borrowings and other sources of medium/longer-term funding. ALCO is authorized to engage in interest rate swaps as a means of extending the duration of shorter-term liabilities.

The following strategies are among those used to manage interest rate risk:

- Actively market C&I loans, which tend to have adjustable-rate features, and which generate customer relationships that can result in higher core deposit accounts;
- Actively market equipment finance leases and loans, which tend to have shorter terms and higher interest rates than real estate loans;
- Limit residential mortgage portfolio originations to adjustable-rate and/or shorter-term and/or “relationship” loans that result in core deposit and/or wealth management relationships;
- Actively market core deposit relationships, which are generally longer duration liabilities;
- Utilize medium to longer term certificates of deposit and/or wholesale borrowings to extend liability duration;
- Utilize interest rate swaps to extend liability duration;
- Utilize a loan level / back-to-back interest rate swap program, which converts a borrower’s fixed rate loan to adjustable rate for the Company;
- Closely monitor and actively manage the investment portfolio, including management of duration, prepayment and interest rate risk;
- Maintain adequate levels of capital; and
- Utilize loan sales.

The interest rate swap program is administered by the ALCO and follows procedures and documentation in accordance with regulatory guidance and standards as set forth in ASC 815 for cash flow hedges. The program incorporates pre-purchase analysis, liability designation, sensitivity analysis, correlation analysis, daily mark-to-market analysis and collateral posting as required. The Board is advised of all swap activity. In all of these swaps, the Company is receiving floating and paying fixed interest rates with total notional value of $230.0 million as of September 30, 2021.

In addition, the Company initiated a loan level / back-to-back swap program in support of its commercial lending business. Pursuant to this program, the Company extends a floating rate loan and executes a floating to fixed swap with the borrower. At the same time, the Company executes a third-party swap, the terms of which fully offset the fixed exposure and, result in a final floating rate exposure for the Company. As of September 30, 2021, $731.0 million of notional value in swaps were executed and outstanding with borrowers under this program.

As noted above, the ALCO uses simulation modeling to analyze the Company’s net interest income sensitivity, as well as the Company’s economic value of portfolio equity under various interest rate scenarios. The models are based on the actual maturity and repricing characteristics of rate sensitive assets and liabilities. The models incorporate certain prepayment and interest rate assumptions, which management believes to be reasonable as of September 30, 2021. 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, 2021.

In an immediate and sustained 100 basis point increase in market rates at September 30, 2021, net interest income would increase approximately 5.9 percent for year 1 and 8.9 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, 2021, net interest income for year 1 would increase approximately 10.4 percent, when compared to a flat interest rate scenario. In year 2 net interest income would increase 16.3 percent, when compared to a flat interest rate scenario.

The table below shows the estimated changes in the Company’s economic value of portfolio equity (“EVPE”) that would result from an immediate parallel change in the market interest rates at September 30, 2021.

*(Dollars in thousands)*

| Change In Interest Rates (Basis Points) | Estimated Increase/ Decrease in EVPE Estimated EVPE (1) | Amount | Percent | EVPE as a Percentage of Present Value of Assets (2) EVPE Ratio (3) | Increase/(Decrease) (basis points) |
| --- | ---: | ---: | ---: | ---: | ---: |
| +200 | $697,330 | $16,756 | 2.46% | 11.68% | 75 |
| +100 | 689,879 | 9,305 | 1.37 | 11.32 | 39 |
| Flat interest rates | 680,574 | — | — | 10.93 | — |
| -100 | 635,345 | (45,229) | (6.65) | 10.11 | (82) |

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

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

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

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

The Company’s interest rate sensitivity models indicate the Company is asset sensitive as of September 30, 2021, and that net interest income would improve in a rising rate environment but decline in a falling rate environment.

## Controls and procedures

As filed, 2,581 characters.

The Corporation’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Corporation’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 Corporation’s Chief Executive Officer and Chief Financial Officer have also concluded that there have not been any changes in the Corporation’s internal control over financial reporting during the quarter ended September 30, 2021 that have materially affected, or are reasonable likely to materially affect, the Corporation’s internal control over financial reporting.

The Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures of our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, provides reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system reflects resource constraints; the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns occur because of simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions; over time, control 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.

## Risk factors

As filed, 209 characters.

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, 2020.

Filed Nov 8, 2021.
Source: SEC EDGAR, the filing index for accession 0001564590-21-055112. Last ingested by Listed: Nov 6, 2026, 13:09 ET. No prices; not investment advice.