# PEAPACK GLADSTONE FINANCIAL CORP (PGC) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from PEAPACK GLADSTONE FINANCIAL CORP's 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/1050743/000156459022010083/pgc-10k_20211231.htm Accession: 0001564590-22-010083 Filing date: 2022-03-14 Report date: 2021-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/PGC/ All MD&A years: /company/PGC/mda/ Next year: /company/PGC/mda/fy2022/ (FY 2022) Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS:  This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Such statements are not historical facts and include expressions about Management’s confidence and strategies and Management’s expectations about new and existing programs and products, investments, relationships, opportunities and market conditions.  These statements may be identified by such forward-looking terminology as “expect,” “look,” “believe,” “anticipate,” “may,” or similar statements or variations of such terms.  Actual results may differ materially from such forward-looking statements.  Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to: [[GREPCENT_TABLE]] [["","\u2022","our ability to successfully grow our business and implement our strategic plan, including our ability to generate revenues to offset the increased personnel and other costs related to the strategic plan;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","the impact of anticipated higher operating expenses in 2022 and beyond;"]] [[/GREPCENT_TABLE]] 21 [[GREPCENT_TABLE]] [["","\u2022","our ability to successfully integrate wealth management firm acquisitions;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","our ability to manage our growth;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","our ability to successfully integrate our expanded employee base;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","an unexpected decline in the economy, in particular in our New Jersey and New York market areas;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","declines in our net interest margin caused by the interest rate environment and/or our highly competitive market;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","declines in the value in our investment portfolio;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","impact from the pandemic on our business, operations, customers, allowance for loan losses and capital levels;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","higher than expected increases in our allowance for loan and lease losses;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","higher than expected increases in loan and lease losses or in the level of delinquent, nonperforming, classified and criticized loans;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","changes in interest rates;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","decline in real estate values within our market areas;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","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;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","successful cyberattacks against our IT infrastructure and that of our IT and third-party providers;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","higher than expected FDIC insurance premiums;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","adverse weather conditions;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","our inability to successfully generate new business in new geographic markets;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","a reduction in our lower-cost funding sources;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","our inability to adapt to technological changes;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","claims and litigation pertaining to fiduciary responsibility, environmental laws and other matters;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","our inability to retain key employees;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","demands for loans and deposits in our market areas;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","adverse changes in securities markets;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","changes in accounting policies and practices; and"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","other unexpected material adverse changes in our operations or earnings."]] [[/GREPCENT_TABLE]] 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/or abates. 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: [[GREPCENT_TABLE]] [["","\u2022","demand for our products and services may decline, making it difficult to grow assets and income;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","if the economy worsens, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","our allowance for loan losses may increase if borrowers experience financial difficulties, which will adversely affect our net income;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","a material decrease in net income or a net loss over several quarters could result in an elimination or decrease in the rate of our quarterly cash dividend;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","our wealth management revenues may decline with continuing market turmoil;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","a worsening of business and economic conditions or in the financial markets could result in an impairment of certain intangible assets, such as goodwill;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","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;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","our cyber security risks are increased as the result of an increase in the number of employees working remotely; and"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","FDIC premiums may increase if the agency experience additional resolution costs."]] [[/GREPCENT_TABLE]] 22 Except as may be required by applicable law or regulation, the Company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the Company’s expectations.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. OVERVIEW:  The following discussion and analysis is intended to provide information about the financial condition and results of operations of the Company and its subsidiaries on a consolidated basis and should be read in conjunction with the consolidated financial statements and the related notes and supplemental financial information appearing elsewhere in this report. For the year ended December 31, 2021, the Company recorded net income of $56.6 million, and diluted earnings per share of $2.93 compared to $26.2 million and $1.37, respectively, for 2020, reflecting increases of $30.4 million, or 116 percent, and $1.56 per share, or 114 percent, respectively.  During 2021, the Company continued to focus on executing its Strategic Plan – known as “Expanding Our Reach” – which focuses on the client experience and organic growth across all lines of business. The Strategic Plan called for expansion of the Company’s wealth management business, organically and through acquisitions, and also expansion of the Company’s commercial and industrial (“C&I”) lending platform, through the use of private bankers, who lead with deposit gathering and wealth management discussions.   The following are select highlights from 2021: [[GREPCENT_TABLE]] [["","\u2022","At December 31, 2021, the market value of assets under management and/or administration at Peapack Private was $11.1 billion, reflecting an increase of 26 percent from $8.8 billion at December 31, 2020."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Record wealth fee income from Peapack Private of $53.0 million for 2021, growing from $40.9 million for 2020."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","On July 1, 2021, the Bank closed on the acquisition of Princeton Portfolio Strategies Group (\u201cPPSG\u201d) increasing assets under management by approximately $520 million."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","At December 31, 2021, total C&I loans (including equipment finance and Paycheck Protection Program (\u201cPPP\u201d) loans) comprised 41 percent of the total loan portfolio."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Total \u201ccustomer\u201d deposits (defined as deposits excluding brokered certificate of deposits (\u201cCDs\u201d) and brokered \u201covernight\u201d interest-bearing demand deposits) at December 31, 2021 were $5.15 billion, reflecting an increase of $472.6 million, or 10 percent, when compared to $4.67 billion at December 31, 2020."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Asset quality metrics continued to be strong at December 31, 2021. Nonperforming assets at December 31, 2021 were $15.6 million, or 0.26 percent of total assets. Total loans past due 30 through 89 days and still accruing were $8.6 million or 0.18 percent of total loans at December 31, 2021."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","The Bank\u2019s capital ratios at December 31, 2021 remain well above regulatory well capitalized standards."]] [[/GREPCENT_TABLE]] CRITICAL ACCOUNTING POLICIES AND ESTIMATES:  Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Company’s consolidated financial statements contains a summary of the Company’s significant accounting policies. Management believes that the Company’s policy with respect to the methodology for the determination of the allowance for loan and lease losses involves a high degree of complexity and requires Management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical accounting policy and its application are periodically reviewed with the Audit Committee and the Board of Directors.   23 The provision for loan 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 take 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. 24 EARNINGS SUMMARY:  The following table presents certain key aspects of our performance for the years ended December 31, 2021, 2020 and 2019. [[GREPCENT_TABLE]] [["","","At or for the Years Ended December 31,","","","Change"],["(Dollars in thousands, except share and per share data)","","2021","","","2020","","","2019","","","2021 v 2020","","","2020 v 2019"],["Results of Operations:"],["Interest income","","$","160,067","","","$","165,750","","","$","180,670","","","$","(5,683",")","","$","(14,920",")"],["Interest expense","","","22,006","","","","38,148","","","","60,396","","","","(16,142",")","","","(22,248",")"],["Net interest income","","","138,061","","","","127,602","","","","120,274","","","","10,459","","","","7,328"],["Provision for loan losses","","","6,475","","","","32,400","","","","4,000","","","","(25,925",")","","","28,400"],["Net interest income after provision for loan losses","","","131,586","","","","95,202","","","","116,274","","","","36,384","","","","(21,072",")"],["Wealth management fee income","","","52,987","","","","40,861","","","","38,363","","","","12,126","","","","2,498"],["Other income","","","19,256","","","","20,899","","","","16,333","","","","(1,643",")","","","4,566"],["Total operating expense","","","126,167","","","","124,959","","","","104,848","","","","1,208","","","","20,111"],["Income before income tax expense","","","77,662","","","","32,003","","","","66,122","","","","45,659","","","","(34,119",")"],["Income tax expense","","","21,040","","","","5,811","","","","18,688","","","","15,229","","","","(12,877",")"],["Net income","","$","56,622","","","$","26,192","","","$","47,434","","","$","30,430","","","$","(21,242",")"],["Per Share Data:"],["Basic earnings per common share","","$","3.01","","","$","1.39","","","$","2.46","","","$","1.62","","","$","(1.07",")"],["Diluted earnings per common share","","","2.93","","","","1.37","","","","2.44","","","","1.56","","","","(1.07",")"],["Cash dividends declared","","","0.20","","","","0.20","","","","0.20","","","","\u2014","","","","\u2014"],["Book value end-of-period","","","29.70","","","","27.78","","","","26.61","","","","1.92","","","","1.17"],["Average common shares outstanding","","","18,788,679","","","","18,896,825","","","","19,268,870","","","","(108,146",")","","","(372,045",")"],["Common stock equivalents (dilutive)","","","503,923","","","","184,362","","","","142,578","","","","319,561","","","","41,784"],["Diluted average common shares outstanding","","","19,292,602","","","","19,081,187","","","","19,411,448","","","","211,415","","","","(330,261",")"],["Average equity to average assets","","","8.93","%","","","8.87","%","","","10.19","%","","","0.06","%","","","(1.32",")%"],["Return on average assets","","","0.94","","","","0.45","","","","0.99","","","","0.49","","","","(0.54",")"],["Return on average equity","","","10.56","","","","5.11","","","","9.70","","","","5.45","","","","(4.59",")"],["Dividend payout ratio","","","6.67","","","","14.43","","","","8.15","","","","(7.76",")","","","6.28"],["Net interest margin","","","2.38","","","","2.31","","","","2.63","","","","0.07","","","","(0.32",")"],["Noninterest expenses to average assets","","","2.10","","","","2.16","","","","2.19","","","","(0.06",")","","","(0.03",")"],["Noninterest income to average assets","","","1.20","","","","1.07","","","","1.14","","","","0.13","","","","(0.07",")"],["Balance sheet data (at period end):"],["Total assets","","$","6,077,993","","","$","5,890,442","","","$","5,182,879","","","$","187,551","","","$","707,563"],["Securities held to maturity","","","108,680","","","","\u2014","","","","\u2014","","","","108,680","","","","\u2014"],["Securities available to sale","","","796,753","","","","622,689","","","","390,755","","","","174,064","","","","231,934"],["Equity security","","","14,685","","","","15,117","","","","10,836","","","","(432",")","","","4,281"],["FHLB and FRB stock, at cost","","","12,950","","","","13,709","","","","24,068","","","","(759",")","","","(10,359",")"],["Total loans","","","4,806,721","","","","4,372,437","","","","4,394,137","","","","434,284","","","","(21,700",")"],["Allowance for loan losses","","","61,697","","","","67,309","","","","43,676","","","","(5,612",")","","","23,633"],["Total deposits","","","5,266,149","","","","4,818,484","","","","4,243,511","","","","447,665","","","","574,973"],["Total shareholders\u2019 equity","","","546,388","","","","527,122","","","","503,652","","","","19,266","","","","23,470"],["Cash dividends:"],["Common","","","3,775","","","","3,780","","","","3,865","","","","(5",")","","","(85",")"],["Assets under management and/or administration at Wealth Management Division (market value)","","11.1 billion","","","8.8 billion","","","7.5 billion","","","2.3 billion","","","1.3 billion"],["Asset quality ratios (at period end):"]] [[/GREPCENT_TABLE]] 25 [[GREPCENT_TABLE]] [["Nonperforming loans to total loans","","","0.32","%","","","0.26","%","","","0.66","%","","","0.06","%","","","(0.40",")%"],["Nonperforming assets to total assets","","","0.26","","","","0.19","","","","0.56","","","","0.07","","","","(0.37",")"],["Allowance for loan losses to nonperforming loans","","","396.18","","","","589.91","","","","151.23","","","","(193.73",")","","","438.68"],["Allowance for loan losses to total loans","","","1.28","","","","1.54","","","","0.99","","","","(0.26",")","","","0.55"],["Net charge-offs/(recoveries) to average loans plus other real estate owned","","","0.27","","","","0.19","","","","(0.03",")","","","0.08","","","","0.22"],["Liquidity and capital ratios:"],["Average loans to average deposits","","","89.17","%","","","96.97","%","","","100.80","%","","","(7.80",")%","","","(3.83",")%"],["Total shareholders\u2019 equity to total assets","","","8.99","","","","8.95","","","","9.72","","","","0.04","","","","(0.77",")"],["Selected Balance Sheet Ratios of the Company:"],["Regulatory total capital to risk-weighted assets","","","14.64","%","","","17.67","%","","","14.20","%","","","(3.03",")%","","","3.47","%"],["Regulatory leverage ratio","","","8.29","","","","8.53","","","","9.33","","","","(0.24",")","","","(0.80",")"],["Average loans to average deposits","","","89.28","","","","96.97","","","","100.80","","","","(7.69",")","","","(3.83",")"],["Noninterest bearing deposits to total deposits","","","18.16","","","","17.30","","","","12.47","","","","0.86","","","","4.83"],["Time deposits to total deposits","","","9.02","","","","12.37","","","","16.85","","","","(3.35",")","","","(4.48",")"]] [[/GREPCENT_TABLE]] 2021 compared to 2020 The Company recorded net income of $56.62 million and diluted earnings per share of $2.93 for the year ended December 31, 2021, compared to net income of $26.19 million and diluted earnings per share of $1.37 for the year ended December 31, 2020. These results produced a return on average assets of 0.94 percent and 0.45 percent for 2021 and 2020, respectively, and a return on average shareholders’ equity of 10.56 percent and 5.11 percent for 2021 and 2020, respectively. The increase in net income for 2021 was principally driven by the Company’s wealth management and commercial banking businesses. 2021 included increased wealth management income, corporate advisory fees and SBA income, as well as increased net interest income resulting from asset growth, coupled with margin improvement.  The earnings for 2021 also benefitted from a significantly lower provision for loan losses. These improvements to net income were partially offset by a tax benefit of $3.2 million recorded in the first quarter of 2020 caused by the changes in the treatment of tax net operating losses (“NOL”) under the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  Increased net interest income was due to the Company strategically lowering its cost of interest-bearing liabilities by increasing transaction accounts and decreasing the certificates of deposits and borrowed funds combined with an increase in average interest-earning assets in 2021.  Operating expenses increased by $1.2 million due to twelve months of expense related to the December 2020 hires of Noyes and Lucas, six months of expense related the July 2021 acquisition of PPSG, a swap valuation allowance of $2.20 million, the redemption of subordinated debt expense of $648,000, and severance expense related to corporate restructurings of $1.5 million. 2020 operating expenses included a $4.78 million prepayment of FHLB advances, $4.43 million valuation allowance for a loan held for sale, $210,000 for the consolidation of two private banking offices and $278,000 for the closure of a retail branch.   NET INTEREST INCOME AND NET INTEREST MARGIN The major source of the Company’s operating income is net interest income, which is the difference between interest and dividends earned on interest-earning assets and fees earned on loans, and interest paid on interest-bearing liabilities.  Interest-earning assets include loans, investment securities, interest-earning deposits and federal funds sold.  Interest-bearing liabilities include interest-bearing checking, savings and time deposits, Federal Home Loan Bank advances, subordinated debt and other borrowings.  Net interest income is determined by the difference between the average yields earned on interest-earning assets and the average cost of interest-bearing liabilities (“net interest spread”) and the relative amounts of interest-earning assets and interest-bearing liabilities.  Net interest margin is calculated as net interest income as a percent of total interest-earning assets.  The Company’s net interest income, spread and margin are affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows and general levels of nonperforming assets. 26 The following table summarizes the Company’s net interest income and margin, on a fully tax-equivalent basis (“FTE basis”), for the periods indicated: [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(Dollars in thousands)","","2021","","","2020","","","2019"],["NII/NIM excluding the below (1)","","$","134,206","","","","2.50","%","","$","123,099","","","","2.58","%","","$","119,032","","","","2.67","%"],["Prepayment premiums received on loan paydowns","","","2,085","","","","0.04","","","","1,452","","","","0.02","","","","1,328","","","","0.03"],["Effect of maintaining excess interest earning cash","","","(420",")","","","(0.17",")","","","(1,320",")","","","(0.21",")","","","(86",")","","","(0.07",")"],["Effect of PPP loans","","","2,190","","","","0.01","","","","4,371","","","","(0.08",")","","","\u2014","","","","\u2014"],["NII/NIM as reported","","$","138,061","","","","2.38","%","","$","127,602","","","","2.31","%","","$","120,274","","","","2.63","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","(1)","\u201cNII\u201d means net interest income and \u201cNIM means net interest margin."]] [[/GREPCENT_TABLE]] 27 The following table compares the average balance sheets, interest rate spreads and net interest margins for the years ended December 31, 2021, 2020 and 2019 (on an FTE basis): [[GREPCENT_TABLE]] [["Year Ended December 31, 2021"],["","","Average","","","Income/Expense","","","Yield"],["(Dollars in thousands)","","Balance","","","(FTE)","","","(FTE)"],["Assets:"],["Interest-earnings assets:"],["Investments:"],["Taxable (1)","","$","838,174","","","$","11,577","","","","1.38","%"],["Tax-exempt (1)(2)","","","6,579","","","","296","","","","4.50"],["Loans (2)(3):"],["Mortgages","","","503,616","","","","15,359","","","","3.05"],["Commercial mortgages","","","2,032,318","","","","63,298","","","","3.11"],["Commercial","","","1,881,683","","","","66,652","","","","3.54"],["Commercial construction","","","20,420","","","","692","","","","3.39"],["Installment","","","34,390","","","","1,030","","","","3.00"],["Home Equity","","","44,735","","","","1,479","","","","3.31"],["Other","","","247","","","","21","","","","8.50"],["Total loans","","","4,517,409","","","","148,531","","","","3.29"],["Federal funds sold","","","48","","","","\u2014","","","","0.13"],["Interest-earning deposits","","","477,477","","","","545","","","","0.11"],["Total interest-earning assets","","","5,839,687","","","","160,949","","","","2.76","%"],["Noninterest-earning assets:"],["Cash and due from banks","","","10,396"],["Allowance for loan losses","","","(67,075",")"],["Premises and equipment","","","23,094"],["Other assets","","","197,893"],["Total noninterest-earning assets","","","164,308"],["Total assets","","$","6,003,995"],["Liabilities and shareholders\u2019 equity:"],["Interest-bearing deposits:"],["Checking","","$","2,078,658","","","$","4,426","","","","0.21","%"],["Money markets","","","1,260,865","","","","2,882","","","","0.23"],["Savings","","","146,210","","","","75","","","","0.05"],["Certificates of deposit - retail and listing service","","","483,889","","","","4,058","","","","0.84"],["Subtotal interest-bearing deposits","","","3,969,622","","","","11,441","","","","0.29"],["Interest-bearing demand - brokered","","","96,301","","","","1,721","","","","1.79"],["Certificates of deposit - brokered","","","33,790","","","","1,058","","","","3.13"],["Total interest-bearing deposits","","","4,099,713","","","","14,220","","","","0.35"],["Borrowed funds","","","110,077","","","","473","","","","0.43"],["Finance lease liability","","","6,260","","","","300","","","","4.79"],["Subordinated debt","","","156,888","","","","7,013","","","","4.47"],["Total interest-bearing liabilities","","","4,372,938","","","","22,006","","","","0.50","%"],["Noninterest-bearing liabilities:"],["Demand deposits","","","959,912"],["Accrued expenses and other liabilities","","","134,948"],["Total noninterest-bearing liabilities","","","1,094,860"],["Shareholders\u2019 equity","","","536,197"],["Total liabilities and shareholders\u2019 equity","","$","6,003,995"],["Net interest income","","","","","","$","138,943"],["Net interest spread","","","","","","","","","","","2.26","%"],["Net interest margin (4)","","","","","","","","","","","2.38","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","1.","Average balances for available for sale securities are based on amortized cost."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","2.","Interest income is presented on a tax-equivalent basis using a 21 percent federal income tax rate."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","3.","Loans are stated net of unearned income and include nonaccrual loans."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","4.","Net interest income on an FTE basis as a percentage of total average interest-earning assets."]] [[/GREPCENT_TABLE]] 28 [[GREPCENT_TABLE]] [["Year Ended December 31, 2020"],["","","Average","","","Income/Expense","","","Yield"],["(Dollars in thousands)","","Balance","","","(FTE)","","","(FTE)"],["Assets:"],["Interest-earnings assets:"],["Investments:"],["Taxable (1)","","$","510,245","","","$","8,782","","","","1.72","%"],["Tax-exempt (1)(2)","","","9,479","","","","477","","","","5.03"],["Loans (2)(3):"],["Mortgages","","","528,687","","","","17,882","","","","3.38"],["Commercial mortgages","","","1,958,262","","","","64,541","","","","3.30"],["Commercial","","","1,969,115","","","","71,037","","","","3.61"],["Commercial construction","","","5,932","","","","295","","","","4.97"],["Installment","","","51,007","","","","1,532","","","","3.00"],["Home Equity","","","53,853","","","","1,940","","","","3.60"],["Other","","","311","","","","29","","","","9.32"],["Total loans","","","4,567,167","","","","157,256","","","","3.44"],["Federal funds sold","","","102","","","","\u2014","","","","0.25"],["Interest-earning deposits","","","504,753","","","","968","","","","0.19"],["Total interest-earning assets","","","5,591,746","","","$","167,483","","","","3.00","%"],["Noninterest-earning assets:"],["Cash and due from banks","","","7,025"],["Allowance for loan losses","","","(61,401",")"],["Premises and equipment","","","21,455"],["Other assets","","","219,287"],["Total noninterest-earning assets","","","186,366"],["Total assets","","$","5,778,112"],["Liabilities and shareholders\u2019 equity:"],["Interest-bearing deposits:"],["Checking","","$","1,742,846","","","$","7,279","","","","0.42","%"],["Money markets","","","1,227,295","","","","6,185","","","","0.50"],["Savings","","","120,780","","","","63","","","","0.05"],["Certificates of deposit - retail and listing service","","","654,652","","","","11,476","","","","1.75"],["Subtotal interest-bearing deposits","","","3,745,573","","","","25,003","","","","0.67"],["Interest-bearing demand - brokered","","","143,388","","","","2,773","","","","1.93"],["Certificates of deposit - brokered","","","33,735","","","","1,061","","","","3.15"],["Total interest-bearing deposits","","","3,922,696","","","","28,837","","","","0.74"],["Borrowed funds","","","308,814","","","","3,976","","","","1.29"],["Finance lease liability","","","7,157","","","","343","","","","4.79"],["Subordinated debt","","","86,246","","","","4,992","","","","5.79"],["Total interest-bearing liabilities","","","4,324,913","","","","38,148","","","","0.88","%"],["Noninterest-bearing liabilities:"],["Demand deposits","","","787,191"],["Accrued expenses and other liabilities","","","153,648"],["Total noninterest-bearing liabilities","","","940,839"],["Shareholders\u2019 equity","","","512,360"],["Total liabilities and shareholders\u2019 equity","","$","5,778,112"],["Net interest income","","","","","","$","129,335"],["Net interest spread","","","","","","","","","","","2.12","%"],["Net interest margin (4)","","","","","","","","","","","2.31","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","1.","Average balances for available for sale securities are based on amortized cost."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","2.","Interest income is presented on a tax-equivalent basis using a 21 percent federal income tax rate."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","3.","Loans are stated net of unearned income and include nonaccrual loans."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","4.","Net interest income on an FTE basis as a percentage of total average interest-earning assets."]] [[/GREPCENT_TABLE]] 29 [[GREPCENT_TABLE]] [["Year Ended December 31, 2019"],["","","Average","","","Income/Expense","","","Yield"],["(Dollars in thousands)","","Balance","","","(FTE)","","","(FTE)"],["Assets:"],["Interest-earnings assets:"],["Investments:"],["Taxable (1)","","$","391,666","","","$","10,228","","","","2.61","%"],["Tax-exempt (1)(2)","","","14,930","","","","728","","","","4.88"],["Loans (2)(3):"],["Mortgages","","","565,935","","","","19,321","","","","3.41"],["Commercial mortgages","","","1,857,014","","","","72,061","","","","3.88"],["Commercial","","","1,498,077","","","","71,071","","","","4.74"],["Commercial construction","","","1,881","","","","132","","","","7.02"],["Installment","","","54,555","","","","2,246","","","","4.12"],["Home Equity","","","60,036","","","","2,981","","","","4.97"],["Other","","","391","","","","42","","","","10.74"],["Total loans","","","4,037,889","","","","167,854","","","","4.16"],["Federal funds sold","","","102","","","","\u2014","","","","0.25"],["Interest-earning deposits","","","223,629","","","","4,457","","","","1.99"],["Total interest-earning assets","","","4,668,216","","","$","183,267","","","","3.93","%"],["Noninterest-earning assets:"],["Cash and due from banks","","","5,477"],["Allowance for loan losses","","","(40,328",")"],["Premises and equipment","","","21,176"],["Other assets","","","142,156"],["Total noninterest-earning assets","","","128,481"],["Total assets","","$","4,796,697"],["Liabilities and shareholders\u2019 equity:"],["Interest-bearing deposits:"],["Checking","","$","1,342,901","","","$","15,789","","","","1.18","%"],["Money markets","","","1,189,880","","","","16,434","","","","1.38"],["Savings","","","113,312","","","","63","","","","0.06"],["Certificates of deposit - retail and listing service","","","631,999","","","","14,210","","","","2.25"],["Subtotal interest-bearing deposits","","","3,278,092","","","","46,496","","","","1.42"],["Interest-bearing demand \u2013 brokered","","","180,000","","","","3,457","","","","1.92"],["Certificates of deposit \u2013 brokered","","","42,460","","","","1,225","","","","2.89"],["Total interest-bearing deposits","","","3,500,552","","","","51,178","","","","1.46"],["Borrowed funds","","","136,992","","","","3,941","","","","2.88"],["Finance lease liability","","","7,956","","","","382","","","","4.80"],["Subordinated debt","","","83,300","","","","4,895","","","","5.88"],["Total interest-bearing liabilities","","","3,728,800","","","","60,396","","","","1.62","%"],["Noninterest-bearing liabilities:"],["Demand deposits","","","505,486"],["Accrued expenses and other liabilities","","","73,601"],["Total noninterest-bearing liabilities","","","579,087"],["Shareholders\u2019 equity","","","488,810"],["Total liabilities and shareholders\u2019 equity","","$","4,796,697"],["Net interest income","","","","","","$","122,871"],["Net interest spread","","","","","","","","","","","2.31","%"],["Net interest margin (4)","","","","","","","","","","","2.63","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","1.","Average balances for available for sale securities are based on amortized cost."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","2.","Interest income is presented on a tax-equivalent basis using a 21 percent federal income tax rate."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","3.","Loans are stated net of unearned income and include nonaccrual loans."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","4.","Net interest income on an FTE basis as a percentage of total average interest-earning assets."]] [[/GREPCENT_TABLE]] 30 The effect of volume and rate changes on net interest income (on an FTE basis) for the periods indicated are shown below: [[GREPCENT_TABLE]] [["","","Year Ended 2021 Compared with 2020","","","Year Ended 2020 Compared with 2019"],["","","","","","","","","","","Net","","","","","","","","","","","Net"],["","","Difference due to","","","Change In","","","Change In","","","Change In"],["","","Change In:","","","Income/","","","Income/","","","Income/"],["(In Thousands):","","Volume","","","Rate","","","Expense","","","Volume","","","Rate","","","Expense"],["ASSETS:"],["Investments","","$","4,296","","","$","(1,682",")","","$","2,614","","","$","2,038","","","$","(3,735",")","","$","(1,697",")"],["Loans","","","(1,588",")","","","(7,137",")","","","(8,725",")","","","21,463","","","","(32,061",")","","","(10,598",")"],["Federal funds sold","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["Interest-earning deposits","","","(48",")","","","(375",")","","","(423",")","","","2,652","","","","(6,141",")","","","(3,489",")"],["Total interest income","","$","2,660","","","$","(9,194",")","","$","(6,534",")","","$","26,153","","","$","(41,937",")","","$","(15,784",")"],["LIABILITIES:"],["Checking","","$","703","","","$","(3,556",")","","$","(2,853",")","","$","2,838","","","$","(11,348",")","","$","(8,510",")"],["Money market","","","173","","","","(3,476",")","","","(3,303",")","","","286","","","","(10,535",")","","","(10,249",")"],["Savings","","","12","","","","\u2014","","","","12","","","","11","","","","(11",")","","","\u2014"],["Certificates of deposit - retail","","","(2,478",")","","","(4,940",")","","","(7,418",")","","","498","","","","(3,232",")","","","(2,734",")"],["Certificates of deposit - brokered","","","2","","","","(5",")","","","(3",")","","","(271",")","","","107","","","","(164",")"],["Interest bearing demand brokered","","","(862",")","","","(190",")","","","(1,052",")","","","(702",")","","","18","","","","(684",")"],["Borrowed funds","","","(2,504",")","","","(999",")","","","(3,503",")","","","464","","","","(429",")","","","35"],["Finance lease liability","","","(42",")","","","(1",")","","","(43",")","","","(39",")","","","\u2014","","","","(39",")"],["Subordinated debt","","","3,159","","","","(1,138",")","","","2,021","","","","172","","","","(75",")","","","97"],["Total interest expense","","$","(1,837",")","","$","(14,305",")","","$","(16,142",")","","$","3,257","","","$","(25,505",")","","$","(22,248",")"],["Net interest income","","$","4,497","","","$","5,111","","","$","9,608","","","$","22,896","","","$","(16,432",")","","$","6,464"]] [[/GREPCENT_TABLE]] 2021 compared to 2020 Net interest income, on a fully tax-equivalent basis, grew $9.6 million, or 7 percent, in 2021 to $138.9 million from $129.3 million in 2020. The net interest margin was 2.38 percent and 2.31 percent for the years ended December 31, 2021 and 2020, respectively, an increase of 7 basis points year over year. The growth in net interest income and NIM for the year ended December 31, 2021, when compared to 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. NIM also benefitted from the use of some of our excess liquidity to purchase investment securities when compared to the 2020. On a fully tax-equivalent basis, interest income on average interest-earning assets decreased $6.5 million, or 4 percent, to $160.9 million in 2021 from $167.5 million in 2020. Average interest-earning assets for the year ended December 31, 2021, totaled $5.84 billion compared to $5.59 billion for 2020, an increase of $247.9 million or 4 percent. The increase in the average balance of interest-earning assets for the year ended December 31, 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. The average rate earned on earning assets was 2.76 percent in 2021, compared to 3.00 percent in 2020, a decrease of 24 basis points.  The decrease in average yields on interest-earning assets for the year ended December 31, 2021, was due to a declining rate environment, which resulted in a decrease in the average yield on our loan portfolio of 15 basis points. The average yield on interest-earning assets was also affected by elevated levels of lower yielding investment securities. The 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 from 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 December 31, 2021, and that net interest income would improve in a rising rate environment but decline in a falling rate environment. The increase in the average balance of interest-earning assets for the year ended December 31, 2021, as compared to 2020, reflects an increase in the average balance of investments, offset by a slight decline in the average balance of loans.  Average loans declined slightly by $49.8 million to $4.52 billion driven by a decline in residential mortgages of $25.1 million to $503.6 million and commercial loans of $87.4 million to $1.88 billion. The decline in the residential portfolio for the year ended December 31, 2021 was partially due to the sale of $12.2 million of fixed-rate residential mortgage loans as part of the Company’s balance sheet management. The commercial loan decline was primarily due to the forgiveness and 31 sale of PPP loans, which declined $181.8 million to $13.8 million at December 31, 2021. The declines in the residential and commercial loan portfolios were partially offset by an increase of $74.1 million in commercial mortgages to $2.03 billion. The increased multifamily production helped to offset loan portfolio run-off and utilize excess liquidity. The average balance of investment securities totaled $844.8 million for 2021 compared to $519.7 million for 2020, reflecting an increase of $325.0 million, or 63 percent.  The increase in the average balance of investment securities 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 $477.5 million for 2021 compared to $504.8 million for 2020, reflecting a decrease of $27.3 million or 5 percent.  The decrease in the average balance of interest-earning deposits for 2021 was primarily due to the Company’s deploying balance sheet liquidity to fund multifamily loan originations and investment security purchases. Average interest-bearing liabilities for the year ended December 31, 2021, totaled $4.37 billion, an increase of $48.0 million, or 1 percent, from $4.32 billion for 2020. The average rate paid decreased 38 basis points to 0.50 percent for 2021 from 0.88 percent for 2020. The increase in the average balance of interest-bearing liabilities was principally due to growth in customer deposits (excluding brokered CDs and brokered interest-bearing demand but including funds from reciprocal deposits) of $224.0 million for 2021 despite CDs declining $170.8 million.  The growth in customer deposits was primarily sourced from our branch network and was due to a focus on providing high-touch client service; new deposit relationships related to PPP; and a full array of treasury management products that support core deposit growth. This growth was partially offset by a decline of $47.0 million of brokered deposits. Average rates paid on interest-bearing deposits for 2021 were 0.35 percent compared to 0.74 percent for 2020, reflecting a decrease of 39 basis points.  The decrease in the average rate paid on deposits was principally due to repricing of our deposit base to align with the recent Fed rate decreases as well as allowing higher costing deposits to run-off. The average balance of borrowings was $110.1 million for 2021 compared to $308.8 million during 2020, a decrease of $198.7 million.  The decrease in the average balance of borrowings was principally due to the Company’s participation in the Federal Reserve’s Paycheck Protection Plan Lending Facility (“PPPLF”), which decreased as PPP loans were forgiven as well as the Company’s prepayment of $105.0 million of FHLB advances during the fourth quarter of 2020 and $15.0 million during the second quarter of 2021. The average cost of borrowings decreased 86 basis points for 2021 when compared to 2020 primarily due to the prepayment of the FHLB borrowings, which had a weighted average cost of 3.20 percent. In June 2021, the Company redeemed $50.0 million of subordinated debt bearing interest at an annual rate of 6.0 percent, issued in June 2016 that was set to re-price to approximately 5.0 percent. In December 2020, the Company issued $100.0 million of subordinated debt ($98.2 million net of issuance costs) bearing interest at an annual rate of 3.50 percent for the first five years, and thereafter at an adjustable rate until maturity in December 2030 or earlier redemption. In December 2017, the Company issued $35.0 million of subordinated debt ($34.1 million net of issuance costs) bearing interest at an annual rate of 4.75 percent for the first five years, and thereafter at an adjustable rate until maturity in December 2027 or earlier redemption.   INVESTMENT SECURITIES:  Investment securities held to maturity are those securities that the Company has both the ability and intent to hold to maturity.  These securities are carried at amortized cost.  Investment securities available for sale are purchased, sold and/or maintained as a part of the Company’s overall balance sheet, liquidity and interest rate risk management strategies, and in response to changes in interest rates, liquidity needs, prepayment speeds and/or other factors. These securities are carried at estimated fair value, and unrealized changes in fair value are recognized as a separate component of shareholders’ equity, net of income taxes.  Realized gains and losses are recognized in income at the time the securities are sold.  Equity securities are carried at fair value with unrealized gains and losses recorded in non-interest income. At December 31, 2021, the Company had investment securities held to maturity with a carrying cost of $108.7 million and an estimated fair value of $108.5 million.  The Company did not have any investment securities held to maturity as of December 31, 2020. At December 31, 2021, the Company had investment securities available for sale with an estimated fair value of $796.8 million compared with $622.7 million at December 31, 2020. The increase was due to purchases of U.S. government- 32 sponsored securities with excess liquidity as deposits exceeded loan growth.  A net unrealized loss (net of income tax) of $9.9 million and a net unrealized gain (net of income tax) of $5.5 million were included in shareholders’ equity at December 31, 2021 and 2020, respectively. The Company had one equity security (a CRA investment security) with a fair value of $14.7 million and $15.1 million at December 31, 2021 and 2020, respectively.  The Company recorded a $432,000 unrealized loss in securities gains/losses, net on the Consolidated Statements of Income for the year ended December 31, 2021, as compared to a $281,000 unrealized gain for the year ended December 31, 2020 related to the change in the market value of the equity security.   The amortized cost and fair value of investment securities held to maturity and available for sale at December 31, 2021, 2020 and 2019 are shown below: [[GREPCENT_TABLE]] [["","","2021","","","2020","","","2019"],["(In thousands)","","Amortized Cost","","Estimated Fair Value","","","Amortized Cost","","Estimated Fair Value","","","Amortized Cost","","Estimated Fair Value"],["Investment securities - held to maturity:"],["U.S. government-sponsored agencies","","$","40,000","","$","39,982","","","$","\u2014","","$","\u2014","","","$","\u2014","","$","\u2014"],["Mortgage-backed securities-residential (principally U.S. government-sponsored entities)","","","68,680","","","68,478","","","","\u2014","","","\u2014","","","","\u2014","","","\u2014"],["Total investment securities - held to maturity","","$","108,680","","$","108,460","","","$","\u2014","","$","\u2014","","","$","\u2014","","$","\u2014"],["Investment securities - available for sale:"],["U.S. treasuries","","$","\u2014","","$","\u2014","","","$","2,613","","$","2,613","","","$","\u2014","","$","\u2014"],["U.S. government-sponsored agencies","","","280,045","","","272,221","","","","84,424","","","83,771","","","","34,961","","","34,784"],["Mortgage-backed securities-residential (principally U.S. government-sponsored entities)","","","481,062","","","476,974","","","","467,915","","","476,058","","","","337,489","","","338,904"],["SBA pool securities","","","40,649","","","39,561","","","","49,457","","","49,129","","","","2,799","","","2,784"],["State and political subdivision","","","5,431","","","5,476","","","","7,987","","","8,089","","","","11,175","","","11,215"],["Corporate bond","","","2,500","","","2,521","","","","3,000","","","3,029","","","","3,000","","","3,068"],["Total investment securities - available for sale","","$","809,687","","$","796,753","","","$","615,396","","$","622,689","","","$","389,424","","$","390,755"],["Total investment securities","","$","918,367","","$","905,213","","","$","615,396","","$","622,689","","","$","389,424","","$","390,755"]] [[/GREPCENT_TABLE]] 33 The following table presents the contractual maturities and yields of debt securities held to maturity and available for sale as of December 31, 2021.  The weighted average yield is a computation of income within each maturity range based on the amortized cost of securities: [[GREPCENT_TABLE]] [["","","","","","","After 1","","","After 5"],["","","","","","","But","","","But","","","After"],["","","Within","","","Within","","","Within","","","10"],["(Dollars in thousands)","","1 Year","","","5 Years","","","10 Years","","","Years","","","Total"],["Investment securities - held to maturity:"],["U.S. government-sponsored agencies","","$","\u2014","","","$","15,000","","","$","25,000","","","$","\u2014","","","$","40,000"],["","","","\u2014","%","","","1.35","%","","","1.64","%","","","\u2014","%","","","1.53","%"],["Mortgage-backed securities-","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","68,680","","","$","68,680"],["residential (1)","","","\u2014","%","","","\u2014","%","","","\u2014","%","","","1.68","%","","","1.68","%"],["Total investment securities - held to maturity","","$","\u2014","","","$","15,000","","","$","25,000","","","$","68,680","","","$","108,680"],["","","","\u2014","%","","","1.35","%","","","1.64","%","","","1.68","%","","","1.63","%"],["Investment securities - available for sale:"],["U.S. government-sponsored agencies","","$","\u2014","","","$","5,570","","","$","121,286","","","$","145,365","","","$","272,221"],["","","","\u2014","%","","","1.00","%","","","1.32","%","","","1.69","%","","","1.51","%"],["Mortgage-backed securities-","","$","25,167","","","$","19,865","","","$","42,764","","","$","389,178","","","$","476,974"],["residential (1)","","","1.25","%","","","2.38","%","","","1.66","%","","","1.47","%","","","1.51","%"],["SBA pool securities","","$","\u2014","","","$","\u2014","","","$","5,613","","","$","33,948","","","$","39,561"],["","","","\u2014","%","","","\u2014","%","","","2.04","%","","","1.20","%","","","1.32","%"],["State and political subdivisions (2)","","$","3,554","","","$","1,922","","","$","\u2014","","","$","\u2014","","","$","5,476"],["","","","2.16","%","","","2.22","%","","","\u2014","%","","","\u2014","%","","","2.18","%"],["Corporate bond","","$","\u2014","","","$","\u2014","","","$","2,521","","","$","\u2014","","","$","2,521"],["","","","\u2014","%","","","\u2014","%","","","3.00","%","","","\u2014","%","","","3.00","%"],["Total investment securities - available for sale","","$","28,721","","","$","27,357","","","$","172,184","","","$","568,491","","","$","796,753"],["","","","1.36","%","","","2.08","%","","","1.45","%","","","1.51","%","","","1.51","%"],["Total investment securities","","$","28,721","","","$","42,357","","","$","197,184","","","$","637,171","","","$","905,433"],["","","","1.36","%","","","1.83","%","","","1.48","%","","","1.53","%","","","1.53","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","(1)","Shown using stated final maturity"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","(2)","Yields presented on a fully tax-equivalent basis, using a 21 percent federal income tax."]] [[/GREPCENT_TABLE]] 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 2021 was $477.5 million compared to $504.8 million in 2020. LOANS:  The loan portfolio represents the largest portion of the Company’s interest-earning assets and is the primary source of interest and fee income.  Loans are primarily originated in New Jersey and the boroughs of New York City and, to a lesser extent, Pennsylvania and Delaware.  As of December 31, 2021, 41 percent of the total loan portfolio was concentrated in C&I loans (including equipment financing), 33 percent in multifamily loans and 14 percent in commercial mortgages.   Total loans were $4.81 billion and $4.37 billion at December 31, 2021 and 2020, respectively, an increase of $434.3 million, over the previous year. Multifamily mortgage loans were $1.60 billion at December 31, 2021, an increase of $468.9 million or 42 percent when compared to December 31, 2020 due to increased originations.  The Bank utilized its excess liquidity to fund multifamily originations of $624.3 million in 2021 compared to $76.6 million in 2020.  During 2021, commercial mortgages decreased $28.7 million due to increased paydowns compared to 2020. Commercial loans, which includes equipment financing, totaled $1.96 billion at December 31, 2021.  This was a slight increase when compared to December 31, 2020. This portfolio includes loans issued under the PPP, a program under the CARES Act.  The December 31, 2021 commercial loan balance included PPP loans of $13.8 million compared to $195.6 million at December 31, 2020.    In late 2015, the Company began originating loans that are partially guaranteed by the SBA, for the purposes of providing working capital and/or, financing the purchase of equipment, inventory or commercial real estate and that could be used for 34 start-up businesses.  All SBA loans are underwritten and documented as prescribed by the SBA.  The Company generally sells the guaranteed portion of the SBA loans in the secondary market, with the non-guaranteed portion held in the loan portfolio.  During 2021, the Bank sold $37.6 million of the guaranteed portion of SBA loans into the secondary market.  As of December 31, 2021, the balance of the non-guaranteed portion of SBA loans held on our balance sheet totaled $30.1 million and is included in commercial loans. The following table presents the contractual repayments of the loan portfolio, by loan type, at December 31, 2021: [[GREPCENT_TABLE]] [["","","","","","","","","","","After 5 But"],["","","Within","","","After 1 But","","","Within","","","After"],["(In thousands)","","One Year","","","Within 5 Years","","","15 Years","","","15 Years","","","Total"],["Residential mortgage","","$","82,668","","","$","313,316","","","$","82,491","","","$","19,825","","","$","498,300"],["Commercial mortgage (including multifamily)","","","754,936","","","","1,149,611","","","","333,389","","","","20,556","","","","2,258,492"],["Commercial loans (including equipment financing)","","","993,844","","","","904,611","","","","56,702","","","","\u2014","","","","1,955,157"],["Commercial construction","","","13,482","","","","\u2014","","","","6,562","","","","\u2014","","","","20,044"],["Home equity lines of credit","","","40,593","","","","210","","","","\u2014","","","","\u2014","","","","40,803"],["Consumer and other loans","","","28,170","","","","4,959","","","","731","","","","65","","","","33,925"],["Total loans","","$","1,913,693","","","$","2,372,707","","","$","479,875","","","$","40,446","","","$","4,806,721"]] [[/GREPCENT_TABLE]] The following table presents the loans, by loan type, that have a fixed interest rate and an adjustable interest rate due after one year at December 31, 2021: [[GREPCENT_TABLE]] [["","","Fixed","","","Adjustable"],["(In thousands)","","Interest Rate","","","Interest Rate"],["Residential mortgage","","$","216,624","","","$","199,008"],["Commercial mortgage (including multifamily)","","","149,894","","","","1,353,662"],["Commercial loans","","","831,864","","","","129,449"],["Commercial construction","","","6,562","","","","\u2014"],["Consumer loans","","","5,755","","","","\u2014"],["Home equity loans","","","\u2014","","","","210"],["Total loans","","$","1,210,699","","","$","1,682,329"]] [[/GREPCENT_TABLE]] The Company has not made nor invested in subprime loans or “Alt-A” type mortgages.   The geographic breakdown of the multifamily portfolio, net of participated multifamily loans, at December 31, 2021 is as follows: [[GREPCENT_TABLE]] [["(Dollars in thousands)"],["New York","","$","802,231","","","","51","%"],["New Jersey","","","518,468","","","","32"],["Pennsylvania","","","245,693","","","","15"],["Delaware","","","29,474","","","","2"],["Total Multifamily","","$","1,595,866","","","","100","%"]] [[/GREPCENT_TABLE]] 35 A further breakdown of the multifamily portfolio by county within each respective State is as follows: [[GREPCENT_TABLE]] [["New Jersey","","","New York","","","Pennsylvania","","","Delaware"],["Essex County","","","27","%","","Bronx County","","","54","%","","Philadelphia","","","","","","New Castle County","","","100","%"],["","","","","","","","","","","","","County","","","60","%"],["Hudson County","","","26","","","Kings County","","","21","","","York County","","","12"],["Union County","","","16","","","New York County","","","17","","","Lehigh County","","","12"],["Somerset County","","","7","","","All other NY counties","","","8","","","Lycoming County","","","4"],["Morris County","","","6","","","","","","","","","Lackawanna County","","","3"],["Monmouth County","","","4","","","","","","","","","All other PA counties","","","9"],["Passaic County","","","3"],["All other NJ counties","","","11"],["Total","","","100","%","","Total","","","100","%","","Total","","","100","%","","Total","","","100","%"]] [[/GREPCENT_TABLE]] Principal types of owner occupied commercial real estate properties (by Call Report code), included in commercial mortgage loans on the balance sheet, at December 31, 2021 are: [[GREPCENT_TABLE]] [["(Dollars in thousands)"],["Office Buildings/Office Condominiums","","$","75,896","","","","30","%"],["Industrial (including Warehouse)","","","63,301","","","","25"],["Medical Offices","","","45,806","","","","18"],["Retail Buildings/Shopping Centers","","","26,554","","","","11"],["Other Owner Occupied CRE Properties","","","41,046","","","","16"],["Total Owner Occupied CRE Loans","","$","252,603","","","","100","%"]] [[/GREPCENT_TABLE]] Principal types of non-owner occupied commercial real estate properties (by Call Report code), at December 31, 2021 are as follows.  These loans are included in commercial mortgage loans and commercial loans on the Company’s balance sheet. [[GREPCENT_TABLE]] [["(Dollars in thousands)"],["Retail Buildings/Shopping Centers","","$","280,519","","","","28","%"],["Healthcare","","","239,252","","","","24"],["Office Buildings/Office Condominiums","","","92,335","","","","9"],["Hotels and Hospitality","","","96,626","","","","10"],["Industrial (including Warehouse)","","","81,985","","","","8"],["Medical Offices","","","44,517","","","","4"],["Mixed Use (Commercial/Residential)","","","42,684","","","","4"],["Mixed Use (Retail/Office)","","","29,811","","","","3"],["Other Non-Owner Occupied CRE Properties","","","96,250","","","","10"],["Total Non-Owner Occupied CRE Loans","","$","1,003,979","","","","100","%"]] [[/GREPCENT_TABLE]] At December 31, 2021 and 2020, the Bank had a concentration in commercial real estate loans as defined by applicable regulatory guidance.  The following table presents such concentration levels at December 31, 2021 and 2020: [[GREPCENT_TABLE]] [["","","As of December 31,"],["","","2021","","","2020"],["Multifamily mortgage loans as a percent of total regulatory capital of the Bank","","237%","","","188%"],["Non-owner occupied commercial real estate loans as a percent of total regulatory capital of the Bank","","","149","","","","168"],["Total CRE concentration","","386%","","","356%"]] [[/GREPCENT_TABLE]] 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. 36 GOODWILL:  At December 31, 2021, goodwill totaled $36.2 million, an increase of $3.1 million from $33.1 million at December 31, 2020.  The increase in goodwill was due to the acquisition of Princeton Portfolio Strategies Group completed in July 2021.  The Bank intends to continue to grow its wealth management business through acquisition. DEPOSITS:  At December 31, 2021 and 2020, the Company reported total deposits of $5.27 billion and $4.82 billion, an increase of $447.7 million, or 9 percent, year over year. The Company’s strategy is to fund a majority of its loan growth with core deposits, which is an important factor in the generation of net interest income. The Company’s average deposits for 2021 increased $349.7 million, or 7 percent, over 2020 average levels to $5.06 billion. The Company saw the largest dollar growth in noninterest-bearing demand and interest-bearing checking balances. The growth in customer deposits (excluding brokered CDs and brokered interest-bearing demand deposits, but including reciprocal funds discussed below) has come from an increase in retail deposits from our branch network; a focus on providing high-touch client service; new deposit relationships related to our participation in the PPP; and a full array of treasury management products that support core deposit growth. The Company has also successfully focused on: [[GREPCENT_TABLE]] [["","\u2022","Growth in deposits associated with its private banking activities, including lending activities; and"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Business and personal core deposit generation, particularly noninterest-bearing demand and checking."]] [[/GREPCENT_TABLE]] The Company continues to maintain brokered interest-bearing demand deposits matched to interest rate swaps, thereby extending their duration.  Such deposits are generally a more cost-effective alternative to wholesale borrowings and do not require pledging of collateral, as the borrowings do. These deposits decreased to $85.0 million at December 31, 2021 from $110.0 million at the same period in 2020. The Company ensures ample available collateralized liquidity as a backup to these short-term brokered deposits. At December 31, 2021, there were $85.0 million of notional principal interest rate swaps matched to these deposits for interest rate risk management purposes. The following table sets forth information concerning the composition of the Company’s average balance of deposits and average interest rates paid for the following years: [[GREPCENT_TABLE]] [["(Dollars in thousands)","","2021","","","2020","","","2019"],["Noninterest-bearing demand","","$","959,912","","","","\u2014","%","","$","787,191","","","","\u2014","%","","$","505,486","","","","\u2014","%"],["Checking","","","2,078,658","","","","0.21","","","","1,742,846","","","","0.42","","","","1,342,901","","","","1.18"],["Savings","","","146,210","","","","0.05","","","","120,780","","","","0.05","","","","113,312","","","","0.06"],["Money markets","","","1,260,865","","","","0.23","","","","1,227,295","","","","0.50","","","","1,189,880","","","","1.38"],["Certificates of deposit - retail and listing service","","","483,889","","","","0.84","","","","654,652","","","","1.75","","","","631,999","","","","2.25"],["Interest-bearing"],["Demand - brokered","","","96,301","","","","1.79","","","","143,388","","","","1.93","","","","180,000","","","","1.92"],["Certificates of deposit - brokered","","","33,790","","","","3.13","","","","33,735","","","","3.15","","","","42,460","","","","2.89"],["Total deposits","","$","5,059,625","","","","0.28","%","","$","4,709,887","","","","0.61","%","","$","4,006,038","","","","1.28","%"]] [[/GREPCENT_TABLE]] 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.  Reciprocal deposits of $647.8 million, $652.5 million and $423.8 million are included in the Company’s interest-bearing checking deposits as of December 31, 2021, 2020, and 2019, respectively. At December 31, 2021, the aggregate amount of deposits that exceeded the FDIC insurance limit of $250,000 was $959.9 million. At December 31, 2021, the aggregate amount of uninsured time deposits (which are deposits in amounts greater than $250,000, which is the maximum amount for federal deposit insurance) was $140.4 million. At December 31, 2021, we had no deposits that were uninsured for any reason other than being in excess of the maximum amount for federal deposit insurance. 37 The following table shows the maturity for certificates of deposit of $250,000 or more as of December 31, 2021 (in thousands): [[GREPCENT_TABLE]] [["Three months or less","","$","59,255"],["Over three months through six months","","","35,296"],["Over six months through twelve months","","","29,451"],["Over twelve months","","","16,410"],["Total","","$","140,412"]] [[/GREPCENT_TABLE]] FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS:  As part of our overall funding and liquidity management program, from time to time we borrow from the Federal Home Loan Bank. The Company did not have any overnight borrowings at December 31, 2021, 2020 or 2019. During the quarter ended June 30, 2021, the Company terminated an interest rate swap with a notional amount of $15.0 million that was tied to a one-month FHLB advance totaling $15.0 million.   The Company prepaid $105.0 million of FHLB advances, which had a weighted-average interest rate of 3.20 percent resulting in a prepayment penalty of $4.8 million, during 2020.  The repayment of the FHLB advances was expected to provide a benefit to interest expense greater than the prepayment penalty over the remaining life of the advances. The Company had no borrowings from the PPPLF at December 31, 2021 compared to $177.1 million at December 31, 2020.  The borrowings had a rate of 0.35 percent, primarily all of which had a two-year maturity.  The Company utilized the PPPLF to fund PPP loan production. At December 31, 2021, unused short-term or overnight borrowing commitments totaled $1.8 billion from the FHLB, $22.0 million from correspondent banks and $1.2 billion from the Federal Reserve Bank. SUBORDINATED DEBT:  In June 2016, the Company issued $50.0 million in aggregate principal amount of fixed-to-floating subordinated notes (the “2016 Notes”) to certain institutional investors. The 2016 Notes were non-callable for five years, had a stated maturity of June 30, 2026, and bore interest at a fixed rate of 6.0 percent per year until June 30, 2021. From June 30, 2021 to the maturity date or early redemption date, the interest rate would reset quarterly to a level equal to the then current three-month LIBOR rate plus 485 basis points, payable quarterly in arrears. 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 issuance costs of $648,000 were written-off during the quarter ended June 30, 2021. In December 2017, the Company issued $35.0 million in aggregate principal amount of fixed-to-floating subordinated notes (the “2017 Notes”) to certain institutional investors. The 2017 Notes are non-callable for five years, have a stated maturity of December 15, 2027, and bear interest at a fixed rate of 4.75 percent per year until December 15, 2022. From December 16, 2022 to the maturity date or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 254 basis points, payable quarterly in arrears. Debt issuance costs incurred totaled $875,000 and are being amortized to maturity. In December 2020, the Company issued $100.0 million in aggregate principal amount of fixed to floating subordinated notes (the “2020 Notes”) to certain institutional investors.  The 2020 Notes are non-callable for five years, have a stated maturity of December 22, 2030, and bear interest at a fixed rate of 3.50 percent per year until December 22, 2025.  From December 23, 2025 to the maturity date or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month SOFR plus 326 basis points, payable quarterly in arrears.  Debt issuance costs incurred totaled $1.9 million and are being amortized to maturity. Subordinated debt is presented net of issuance cost on the Consolidated Statements of Condition. The subordinated debt issuances are included in the Company’s regulatory total capital amount and ratio.   In connection with the issuance of the 2020 Notes, the Company obtained ratings from Kroll Bond Rating Agency (“KBRA”) and Moody’s Investors Service (“Moody’s”). KBRA assigned investment grade rating of BBB- and Moody’s assigned investment grade rating of Baa3 for the 2020 Notes at the time of issuance. 38 ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION:  The allowance for loan losses was $61.7 million at December 31, 2021 compared to $67.3 million at December 31, 2020. At December 31, 2021, the allowance for loan losses as a percentage of total loans outstanding was 1.28 percent compared to 1.54 percent at December 31, 2020. The provision for loan losses was $6.5 million for 2021, $32.4 million for 2020 and $4.0 million for 2019. In determining an appropriate amount for the allowance, the Bank segments and evaluates the loan portfolio based on Federal call report codes, which are based on type of collateral. The following portfolio classes have been identified: [[GREPCENT_TABLE]] [["","a)","Primary Residential Mortgages. The Bank originates one to four family residential mortgage loans in the Tri-State area (New York, New Jersey and Connecticut), Pennsylvania and Florida. On a case by case basis, the Bank will lend in additional states. The Bank has developed a portfolio of mortgage products that are used exclusively to attract or maintain wealth, commercial or retail banking relationships. When reviewing residential mortgage loan applications, detailed verifiable information is gathered on income, assets, employment and a tri-merged credit report obtained from a credit repository that will determine total monthly debt obligations. Utilizing an independent appraisal from an approved appraisal management company, the Bank makes residential mortgage loans up to 80 percent of the appraised value and up to 97 percent with private mortgage insurance. Maximum loan-to-value (\u201cLTV\u201d) is determined based on property type and loan amount. On primary residences and second home properties, LTVs range from a maximum of 80 percent for loan amounts to $970,800 for retail customers to 75 percent for loan amounts to $3 million for wealth customers. For investment properties, LTVs range from a maximum of 80 percent for loan amounts to $647,200 for retail customers to 65 percent for loan amounts to $3 million for wealth customers. Loans greater than $3 million will also be considered based on the strength of the overall credit profile of the borrower. Underwriting guidelines include (i) minimum credit report scores of 680 and (ii) a maximum debt to income ratio of 45 percent. The Bank may consider an exception to any guideline if there are strong compensating factors that address and mitigate any risk. Generally, the Bank retains in its portfolio residential mortgage loans with fixed rate maturities of no greater than 7 years, which then convert to annually adjusted floating rates. Community Development loans granted under the Affordable Housing Program are offered with 30-year maturities. Loans with longer maturities or lower credit scores are sold to secondary market investors. The Bank does not originate, purchase or carry any sub-prime mortgage loans."]] [[/GREPCENT_TABLE]] Risk characteristics associated with primary residential mortgage loans typically involve major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as for major medical issues or catastrophic events; and divorce or death. In addition, residential mortgage loans that have adjustable rates could expose the borrower to higher debt service requirements in a rising interest rate environment. Further, real estate values could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential exposure for the Bank. [[GREPCENT_TABLE]] [["","b)","Home Equity Lines of Credit. The Bank provides revolving lines of credit against one to four family residences in the Tri-State area. These loans are primarily in a second lien position, but may be used as a first lien, in lieu of a primary residential first mortgage. When reviewing home equity line of credit applications, the Bank collects detailed verifiable information regarding income, assets, employment and a credit report that will determine total monthly debt obligations. The Bank uses an automated valuation model on all lines up to $250,000 and obtains an independent appraisal of the subject property on all applications exceeding $250,000. LTVs and combined LTVs are capped at 80 percent if the property type is a primary residence. These loans may be subordinate to a first mortgage, which may be from another lending institution. The Bank requires that the mortgage securing the home equity line of credit be no lower than a second lien position. All applications for home equity lines of credit adhere to applicable underwriting standards and guidelines. Exceptions can be made to these guidelines with compensating factors that address and mitigate the risk associated with the exception."]] [[/GREPCENT_TABLE]] Primary risk characteristics associated with home equity lines of credit typically involve major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as for major medical issues or catastrophic events; and divorce or death. In addition, home equity lines of credit typically are made with variable or floating interest rates, such as the Prime Rate, which could expose the borrower to higher debt service requirements in a rising interest rate environment. Further, real estate values could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential exposure for the Bank. 39 [[GREPCENT_TABLE]] [["","c)","Junior Lien Loan on Residence. The Bank provides junior lien loans (\u201cJLL\u201d) against one to four family properties in the Tri-State area. Junior lien loans can be either in the form of an amortizing fixed rate home equity loan or a revolving home equity line of credit. These loans are subordinate to a first mortgage which may be from another lending institution. The Bank requires that the mortgage securing the JLL be no lower than a second lien position. When reviewing the JLL application, the Bank collects detailed verifiable information regarding income, assets, employment and a credit report that determines total monthly debt obligations. The Bank uses an automated valuation model on all JLLs up to $250,000 and obtains an independent appraisal of the subject property on all applications exceeding $250,000. LTVs and combined LTVs are capped at 75 percent if the property type is a primary residence. All applications for JLLs adhere to applicable underwriting standards and guidelines. Exceptions can be made to these guidelines with compensating factors that address and mitigate the risk associated with the exception. Primary risk characteristics associated with JLLs typically involve major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as for major medical issues or catastrophic events; and divorce or death. Further, real estate values could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential exposure for the Bank."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","d)","Multifamily Loans. Multifamily loans are commercial mortgages on residential apartment buildings. Within the multifamily sector, the Bank\u2019s primary focus is to lend against larger non-luxury apartment buildings and rent regulated properties with at least 30 units that are owned and managed by experienced sponsors. As of December 31, 2021, the average property size in the portfolio was 44 units."]] [[/GREPCENT_TABLE]] Multifamily loans are expected to be repaid from the cash flows of the underlying property so the collective amount of rents must be sufficient to cover all operating expense, maintenance, taxes and debt service. The Bank includes debt service coverage covenants in these loans and the average ratio at original underwriting was about 1.49x. Increases in vacancy rates, interest rates or other changes in general economic conditions can have an impact on the borrower and their ability to repay the loan. Certain markets, such as the Boroughs of New York City, are rent regulated, and as such, feature rents that are considered to be below market rates. Generally, rent regulated properties are characterized by relatively stable occupancy levels and longer-term tenants. As a loan asset class for many banks, multifamily loans have experienced much lower historical loss rates compared to other types of commercial lending. The Bank’s loan policy allows loan to appraised value ratios of up to 75 percent and the overall portfolio average loan to value ratio was approximately 58 percent at December 31, 2021 based on appraisals at the time of origination.  The majority of all new originations have a ten-year maturity with a repricing of the interest rate after five years. Multifamily loan terms include prepayment penalties and generally require that the Bank escrow for real estate taxes. Multifamily loans will typically have a minimum debt service coverage ratio that provides for an adequate cushion for unexpected or uncertain events and changes in market conditions. In the loan underwriting process, the Bank requires an independent appraisal and review, appropriate environmental due diligence and an assessment of the property’s condition. Multifamily properties generally present a lower level of risk as compared to investment commercial real estate projects given that there are a larger number of tenants in the property.  The repayment of loans secured by multifamily real estate is typically dependent upon the successful operation of the related real estate property. If the cash flows from the property are reduced (for example, if leases are not obtained or renewed, or a bankruptcy court modifies a lease term), the borrower’s ability to repay the loan may be impaired. 40 [[GREPCENT_TABLE]] [["","e)","Commercial Real Estate Loans. The Bank provides mortgage loans for commercial real estate that is either owner occupied or managed as an investment property (non-owner occupied)."]] [[/GREPCENT_TABLE]] The terms and conditions of all commercial mortgage loans are tailored to the specific attributes of the borrower and any guarantors as well as the nature of the property and loan purpose. In the case of investment commercial real estate properties, the Bank reviews, among other things, the composition and mix of the underlying tenants, terms and conditions of the underlying tenant lease agreements, the resources and experience of the sponsor, and the condition and location of the subject property. Commercial real estate loans are generally considered to have a higher degree of credit risk than multifamily loans as they may be dependent on the ongoing success and operating viability of a fewer number of tenants who are occupying the property and who may have a greater degree of exposure to various industry or economic conditions. To mitigate this risk, the Bank generally requires an assignment of leases, direct recourse to the owners, and a risk appropriate interest rate and loan structure. In underwriting an investment commercial real estate loan, the Bank evaluates the property’s historical operating income as well as its projected sustainable cash flows and generally requires a minimum debt service coverage ratio that provides for an adequate cushion for unexpected or uncertain events and changes in market conditions. With an owner-occupied property, a detailed credit assessment is made of the operating business since its ongoing success and profitability will be the primary source of repayment. While owner-occupied properties include the real estate as collateral, the risk assessment of the operating business is more similar to the underwriting of commercial and industrial loans (described below).  The Bank evaluates factors such as, but not limited to, the expected sustainability of profits and cash flows, the depth and experience of management and ownership, the nature of competition, and the impact of forces like regulatory change and evolving technology. The Bank’s policy allows loan to appraised value ratios of up to 75 percent. Commercial mortgage loans are generally made with an initial fixed rate with periodic rate resets every five or seven years over an underlying market index.  Resets may not be automatic and subject to re-approval.  Commercial mortgage loan terms include prepayment penalties and generally require that the Bank escrow for real estate taxes. The Bank requires an independent appraisal, an assessment of the property’s condition, and appropriate environmental due diligence. With all commercial real estate loans, the Bank’s standard practice is to require a depository relationship. [[GREPCENT_TABLE]] [["","f)","Commercial and Industrial Loans. The Bank provides lines of credit and term loans to operating companies for business purposes. The loans are generally secured by business assets such as accounts receivable, inventory, business vehicles and equipment. In addition, these loans often include commercial real estate as collateral to strengthen the Bank\u2019s position and further mitigate risk. When underwriting business loans, among other things, the Bank evaluates the historical profitability and debt servicing capacity of the borrowing entity and the financial resources and character of the principal owners and guarantors."]] [[/GREPCENT_TABLE]] Commercial and industrial loans are typically repaid first by the cash flows generated by the borrower’s business. The primary risk characteristics are specific to the underlying business and its ability to generate sustainable profitability and resulting positive cash flows. Factors that may influence a business’ profitability include, but are not limited to, demand for its products or services, quality and depth of management, degree of competition, regulatory changes, and general economic conditions. Commercial and industrial loans are generally secured by business assets; however, the ability of the Bank to foreclose and realize sufficient value from the assets is often highly uncertain.  To mitigate the risk characteristics of commercial and industrial loans, the Bank often requires more frequent reporting requirements from the borrower in order to better monitor its business performance. [[GREPCENT_TABLE]] [["","g)","Leasing and Equipment Finance. Peapack Capital Corporation (\u201cPCC\u201d), a subsidiary of the Bank, offers a range of finance solutions nationally. PCC provides term loans and leases secured by assets financed for U.S. based mid-size and large companies. Facilities tend to be fully drawn under fixed-rate terms. PCC serves a broad range of industries including transportation, manufacturing, heavy construction and utilities."]] [[/GREPCENT_TABLE]] Asset risk in PCC’s portfolio is generally recognized through changes to loan income, or through changes to lease related income streams due to fluctuations in lease rates. Changes to lease income can occur when the existing lease contract expires, the asset comes off lease, or the business seeks to enter a new lease agreement.  Asset risk may also change depreciation, resulting from changes in the residual value of the operating lease asset or through impairment of the asset carrying value, which can occur at any time during the life of the asset. 41 Credit risk in PCC’s portfolio generally results from the potential default of borrowers or lessees, which may be driven by customer specific or broader industry related conditions.  Credit losses can impact multiple parts of the income statement including loss of interest/lease/rental income and/or via higher costs and expenses related to the repossession, refurbishment, re-marketing and or re-leasing of assets. [[GREPCENT_TABLE]] [["","h)","Consumer and Other. These are loans to individuals for household, family and other personal expenditures as well as obligations of states and political subdivisions in the U.S. This also represents all other loans that cannot be categorized in any of the previous mentioned loan segments. Consumer loans generally have higher interest rates and shorter terms than residential loans but tend to have higher credit risk due to the type of collateral securing the loan or in some cases the absence of collateral."]] [[/GREPCENT_TABLE]] Management believes that the underwriting guidelines previously described adequately address the primary risk characteristics. Further, the Bank has dedicated staff and resources to monitor and collect on any potentially problematic loans. The provision for loan losses is based upon Management’s review and evaluation of the size and composition of the loan portfolio, actual loan loss experience, level and trend of delinquencies and charge-offs, general market and economic conditions, detailed analysis of individual loans for which full collectability may not be assured, and the existence and fair value of the collateral and guarantees securing the loans. Although Management used the best information available, the level of the allowance for loan 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 losses. Such agencies may require the Company to make additional provisions for loan 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 the State of New Jersey and the New York City metropolitan area.  Accordingly, the collectability of a substantial portion of the carrying value of the Company’s loan portfolio is susceptible to changes in market conditions in these areas and may be adversely affected should real estate values decline or if the geographic areas serviced experience adverse economic conditions. Future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control. 42 The following table presents the loan loss experience, by loan type, during the years ended December 31: [[GREPCENT_TABLE]] [["(Dollars in thousands)","","2021","","","2020","","","2019","","","2018","","","2017"],["Average loans outstanding","","$","4,494,473","","","$","4,552,358","","","$","4,035,603","","","$","3,762,322","","","$","3,564,362"],["Allowance for loan losses at beginning of year","","$","67,309","","","$","43,676","","","$","38,504","","","$","36,440","","","$","32,208"],["Loans charged-off during the period:"],["Residential mortgage","","","12","","","","559","","","","80","","","","138","","","","889"],["Commercial mortgage","","","7,137","","","","1,485","","","","\u2014","","","","1,632","","","","734"],["Commercial","","","5,019","","","","7,132","","","","\u2014","","","","110","","","","298"],["Home equity lines of credit","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","23"],["Consumer and other","","","80","","","","27","","","","55","","","","68","","","","77"],["Total loans charged-off","","","12,248","","","","9,203","","","","135","","","","1,948","","","","2,021"],["Recoveries during the period:"],["Residential mortgage","","","\u2014","","","","373","","","","205","","","","160","","","","173"],["Commercial mortgage","","","\u2014","","","","31","","","","996","","","","70","","","","22"],["Commercial","","","66","","","","17","","","","92","","","","218","","","","141"],["Home equity lines of credit","","","85","","","","11","","","","10","","","","10","","","","62"],["Consumer and other","","","10","","","","4","","","","4","","","","4","","","","5"],["Total recoveries","","","161","","","","436","","","","1,307","","","","462","","","","403"],["Net charge-offs/(recoveries)","","","12,087","","","","8,767","","","","(1,172",")","","","1,486","","","","1,618"],["Provision charge to expense","","","6,475","","","","32,400","","","","4,000","","","","3,550","","","","5,850"],["Allowance for loan losses at end of year","","$","61,697","","","$","67,309","","","$","43,676","","","$","38,504","","","$","36,440"],["Ratios:"],["Allowance for loan losses/total loans (A)","","","1.28","%","","","1.54","%","","","0.99","%","","","0.98","%","","","0.98","%"],["General allowance/total loans (A)","","","1.20","%","","","1.48","%","","","0.93","%","","","0.97","%","","","0.96","%"],["Nonaccrual loans/total loans (A)","","","0.32","%","","","0.26","%","","","0.66","%","","","0.65","%","","","0.37","%"],["Allowance for loan losses/ total nonperforming loans","","","396.18","%","","","589.91","%","","","151.23","%","","","149.73","%","","","269.33","%"],["Net charge offs/average loans:"],["Residential mortgage","","","0.00","%","","","0.00","%","","","-0.01","%","","","0.00","%","","","0.02","%"],["Commercial mortgage","","","0.16","%","","","0.03","%","","","-0.02","%","","","0.04","%","","","0.02","%"],["Commercial","","","0.11","%","","","0.16","%","","","0.00","%","","","0.00","%","","","0.01","%"],["Home equity lines of credit","","","0.00","%","","","0.00","%","","","0.00","%","","","0.00","%","","","0.00","%"],["Consumer and other","","","0.00","%","","","0.00","%","","","0.00","%","","","0.00","%","","","0.00","%"],["Total net charge offs/average loans","","","0.27","%","","","0.19","%","","","-0.03","%","","","0.04","%","","","0.05","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","(A)","The December 31, 2021 and 2020 ALLL coverage ratios include PPP loans of $13.8 million and $195.6 million, respectively."]] [[/GREPCENT_TABLE]] The following table shows the allocation of the allowance for loan losses and the percentage of each loan category, by collateral type, to total loans as of December 31, of the years indicated: [[GREPCENT_TABLE]] [["","","","","","","% of","","","","","","","% of","","","","","","","% of","","","","","","","% of","","","","","","","% of"],["","","","","","","Loan","","","","","","","Loan","","","","","","","Loan","","","","","","","Loan","","","","","","","Loan"],["","","","","","","Category","","","","","","","Category","","","","","","","Category","","","","","","","Category","","","","","","","Category"],["","","","","","","To Total","","","","","","","To Total","","","","","","","To Total","","","","","","","To Total","","","","","","","To Total"],["(Dollars in thousands)","","2021","","","Loans","","","2020","","","Loans","","","2019","","","Loans","","","2018","","","Loans","","","2017","","","Loans"],["Residential","","$","1,520","","","","11.3","","","$","3,138","","","","13.0","","","$","2,231","","","","14.6","","","$","3,685","","","","17.1","","","$","4,318","","","","18.4"],["Commercial and other","","","59,962","","","","87.8","","","","63,892","","","","86.0","","","","41,149","","","","84.1","","","","34,435","","","","81.2","","","","31,773","","","","78.9"],["Consumer and other","","","215","","","","0.9","","","","279","","","","1.0","","","","296","","","","1.3","","","","384","","","","1.7","","","","349","","","","2.7"],["Total","","$","61,697","","","","100.0","","","$","67,309","","","","100.0","","","$","43,676","","","","100.0","","","$","38,504","","","","100.0","","","$","36,440","","","","100.0"]] [[/GREPCENT_TABLE]] The allowance for loan losses as of December 31, 2021 totaled $61.7 million compared to $67.3 million at December 31, 2020.  The allowance for loan losses as a percentage of loans was 1.28 percent as of December 31, 2021 and 1.54 percent as 43 of December 31, 2020.  The provision for loan losses for 2021 totaled $6.5 million compared with $32.4 million for 2020. The decreased provision for loan and lease losses primarily reflected 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. The Company’s provision for loan and lease losses (and its allowance for loan and leases losses) also reflect the Company’s assessment of asset quality metrics, net loan decline, increased net charge-offs, and the composition of the loan portfolio. The Company believes that the allowance for loan losses as of December 31, 2021, represents a reasonable estimate for probable incurred losses in the portfolio at that date.  Effective January 1, 2022, the Company adopted new accounting guidance, which requires the Company to estimate CECL. The Company is currently in the process of finalizing its implementation of controls and processes and performing model validation which could affect the final impact of the adoption of this standard. The portion of the allowance for loan losses allocated to loans collectively evaluated for impairment, commonly referred to as general reserves, was $57.5 million at December 31, 2021 and $64.6 million at December 31, 2020. General reserves at December 31, 2021 represented 1.20 percent of loans collectively evaluated for impairment compared to 1.48 percent at December 31, 2020. The specific reserves on impaired loans were $4.2 million at December 31, 2021 compared to $2.7 million at December 31, 2020. Specific reserves were attributable to a $4.2 million reserve associated with one commercial real estate loan with a large retail component totaling $12.8 million at December 31, 2021. The allowance for loan losses as a percentage of nonperforming loans decreased to 396.18 percent due to an increase in nonperforming loans partially offset by net charge-offs of $12.1 million.  Nonperforming loans increased from $11.4 million to $15.6 million during the year. Nonperforming loans increased primarily due to the transfer of the large commercial real estate loan noted above. Nonperforming loans are specifically evaluated for impairment. Also, the Company commonly records partial charge-offs of the excess of the principal balance over the fair value, less estimated costs to sell, of collateral for collateral-dependent impaired loans.  As a result, the allowance for loan losses does not always change proportionately with changes in nonperforming loans. The Company charged off $12.2 million on loans identified as collateral-dependent impaired loans during 2021, which included a $7.1 million charge-off of the specific reserve on the above mentioned commercial real estate loan compared to $6.0 million on loans during 2020. ASSET QUALITY:  The following table presents various asset quality data at the dates indicated. These tables do not include loans held for sale. [[GREPCENT_TABLE]] [["","","December 31,"],["(Dollars in thousands)","","2021","","","2020","","","2019","","","2018","","","2017"],["Loans past due 30-89 days (1)","","$","8,606","","","$","5,053","","","$","1,910","","","$","1,099","","","$","246"],["Troubled debt restructured loans","","$","3,575","","","$","4,247","","","$","28,178","","","$","24,801","","","$","17,591"],["Loans past due 90 days or more and still accruing interest","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014"],["Nonaccrual loans (2)","","","15,573","","","","11,410","","","","28,881","","","","25,715","","","","13,530"],["Total nonperforming loans","","","15,573","","","","11,410","","","","28,881","","","","25,715","","","","13,530"],["Other real estate owned","","","\u2014","","","","50","","","","50","","","","\u2014","","","","2,090"],["Total nonperforming assets","","$","15,573","","","$","11,460","","","$","28,931","","","$","25,715","","","$","15,620"],["Ratios:"],["Total nonperforming loans/total loans","","","0.32","%","","","0.26","%","","","0.66","%","","","0.65","%","","","0.37","%"],["Total nonperforming loans/total assets","","","0.26","","","","0.19","","","","0.56","","","","0.56","","","","0.32"],["Total nonperforming assets/total assets","","","0.26","","","","0.19","","","","0.56","","","","0.56","","","","0.37"]] [[/GREPCENT_TABLE]] 44 [[GREPCENT_TABLE]] [["","(1)","Includes $6.9 million for one equipment lease principally due to administrative issues with the servicer and at the lessee/borrower at December 31, 2021. Payment was received in January."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","(2)","The increase in nonaccrual loans in 2021 was due to the one large CRE loan with a retail component located in Manhattan. The decrease in nonaccrual loans for 2020 was due to the transfer of several commercial and residential loans totaling $18.5 million to held for sale. The increase in nonaccrual loans for 2019 and 2018 was due to the addition of one healthcare real estate secured loan, totaling $14.5 million with a $1.0 million reserve, as of December 31, 2020."]] [[/GREPCENT_TABLE]] At December 31, 2021, there were no commitments to lend additional funds to borrowers whose loans were classified as nonperforming. Loan Modifications:  Some borrowers have found it difficult to make their loan payments under contractual terms.  In some of these cases, the Company has chosen to grant concessions and modify certain loan terms, which may be characterized as troubled debt restructurings.  The CARES Act granted relief to borrowers that needed loan deferrals due to the impact of the COVID-19 pandemic.  See Loan Modifications discussion below for details regarding the Company’s treatment of loan deferrals in 2020 and 2021. The CARES Act allows financial institutions to suspend application of certain current TDR accounting guidance under ASC 310-40 for loan modifications related to the COVID-19 pandemic made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 national emergency, provided certain criteria are met.  The revised CARES Act extended TDR relief to loan modifications through January 1, 2022.  This relief can be applied to loan modifications for borrowers that were not more than 30 days past due as of December 31, 2019 and to loan modifications that defer or delay the payment of principal or interest or change the interest rate on the loan.  In April 2020, federal and state banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide further interpretation of when a borrower is experiencing financial difficulty, specifically indicating that if the modification is either short-term (e.g., six months) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not considered to be experiencing financial difficulty under ASC 310-40. Throughout 2020 and 2021, the Bank had modified 542 loans with a balance of $947.0 million resulting in the deferral of principal and/or interest for periods ranging from 90 to 180 days.  The table below summarizes the outstanding deferrals as of December 31, 2021.  All of these loans were performing in accordance with their terms prior to modifications and are in conformance with the CARES Act.  Included in the table below is one loan totaling $12.8 million of loan level swaps.  Details with respect to loan modifications are as follows: [[GREPCENT_TABLE]] [["","","","","","","Post-Modification"],["","","","","","","Outstanding"],["","","Number of","","","Recorded"],["(Dollars in thousands)","","Loans","","","Investment"],["Primary residential mortgage","","","1","","","$","145"],["Investment commercial real estate","","","1","","","","12,750"],["Commercial and industrial","","","4","","","","12,656"],["Total","","","6","","","$","25,551"]] [[/GREPCENT_TABLE]] 45 The future performance of these loans, specifically beyond the term of the deferral, is uncertain.  To recognize a credit allowance commensurate with the existing risk, the Company assigned qualitative factors for each of the above portfolio classes for allowance purposes. TROUBLED DEBT RESTRUCTURINGS:  The following table presents the troubled debt restructured loans, by collateral type, at December 31, 2021 and 2020: [[GREPCENT_TABLE]] [["","","December 31,","","","Number of","","","December 31,","","","Number of"],["(Dollars in thousands)","","2021","","","Relationships","","","2020","","","Relationships"],["Primary residential mortgage","","$","1,468","","","","9","","","$","943","","","","6"],["Junior lien loan on residence","","","18","","","","1","","","","\u2014","","","","\u2014"],["Commercial and industrial","","","2,089","","","","2","","","","3,304","","","","5"],["Total","","$","3,575","","","","12","","","$","4,247","","","","11"]] [[/GREPCENT_TABLE]] At December 31, 2021, there were $1.1 million of troubled debt restructured loans included in nonaccrual loans compared to $4.0 million at December 31, 2020. All troubled debt restructured loans are considered and included in impaired loans at December 31, 2021.  There was no allowance allocated to troubled debt restructured loans at December 31, 2021. At December 31, 2020, all troubled debt restructured loans were considered and included in impaired loans and had specific reserves of $3,000. Except as disclosed, the Company did not have any potential problem loans at December 31, 2021 or December 31, 2020 that caused Management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans. Impaired loans totaled $18.1 million and $16.2 million at December 31, 2021 and 2020, respectively.  Impaired loans include nonaccrual loans of $15.6 million and $11.4 million at December 31, 2021 and 2020, respectively. Impaired loans also include accruing troubled debt restructuring loans of $2.5 million at December 31, 2021 and $201,000 at December 31, 2020. The following table presents impaired loans, by collateral type, at December 31, 2021 and 2020: [[GREPCENT_TABLE]] [["","","December 31,","","","Number of","","","December 31,","","","Number of"],["(Dollars in thousands)","","2021","","","Relationships","","","2020","","","Relationships"],["Primary residential mortgage","","$","2,242","","","","14","","","$","1,490","","","","11"],["Junior lien loan on residence","","","18","","","","1","","","","\u2014","","","","\u2014"],["Owner-occupied commercial real estate","","","458","","","","2","","","","807","","","","3"],["Investment commercial real estate","","","12,750","","","","1","","","","4,593","","","","1"],["Commercial and industrial","","","2,584","","","","4","","","","9,314","","","","10"],["Total","","$","18,052","","","","22","","","$","16,204","","","","25"],["Specific reserves, included in the allowance for loan losses","","$","4,234","","","","","","","$","2,703"]] [[/GREPCENT_TABLE]] CONTRACTUAL OBLIGATIONS:  Leases represent obligations entered into by the Company for the use of land and premises. The leases generally have escalation terms based upon certain defined indexes.  Common area maintenance charges may also apply and are adjusted annually based on the terms of the lease agreements.  The Company adopted the guidance in Topic 842 Leases effective January 1, 2019.  See Note 1 to Notes to Consolidated Financial Statements for further discussion. Purchase obligations represent legally binding and enforceable agreements to purchase goods and services from third parties and consist of contractual obligations under data processing service agreements. The Company also enters into various routine rental and maintenance contracts for facilities and equipment.  These contracts are generally for one year. The Company is a limited partner in a Small Business Investment Company (“SBIC”).  As of December 31, 2021, the Company had unfunded commitments of $1.1 million for its investment in SBIC qualified funds. 46 OFF-BALANCE SHEET ARRANGEMENTS:  The following table shows the amounts and expected maturities of significant commitments, consisting primarily of letters of credit, as of December 31, 2021. [[GREPCENT_TABLE]] [["","","Less Than","","","","","","","","","","","More Than"],["(In thousands)","","One Year","","","1-3 Years","","","3-5 Years","","","5 Years","","","Total"],["Financial letters of credit","","$","14,779","","","$","249","","","$","\u2014","","","$","\u2014","","","$","15,028"],["Performance letters of credit","","","3,117","","","","627","","","","\u2014","","","","\u2014","","","","3,744"],["Interest rate lock commitments-residential mortgages","","","28,964","","","","\u2014","","","","\u2014","","","","\u2014","","","","28,964"],["Total letters of credit","","$","46,860","","","$","876","","","$","\u2014","","","$","\u2014","","","$","47,736"]] [[/GREPCENT_TABLE]] Commitments under standby letters of credit, both financial and performance, do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon. OTHER INCOME:  The following table presents the major components of other income (excluding income from our wealth management operations, which is discussed separately): [[GREPCENT_TABLE]] [["","","Years Ended December 31,","","","Change"],["(In thousands)","","2021","","","2020","","","2019","","","2021 vs 2020","","","2020 vs 2019"],["Service charges and fees","","$","3,697","","","$","3,155","","","$","3,488","","","$","542","","","$","(333",")"],["Bank owned life insurance","","","1,696","","","","1,273","","","","1,321","","","","423","","","","(48",")"],["Loan fee income","","","1,646","","","","1,339","","","","1,734","","","","307","","","","(395",")"],["Gains on loans held for sale at fair value (mortgage banking)","","","2,194","","","","3,266","","","","721","","","","(1,072",")","","","2,545"],["Securities gains/(losses), net","","","(432",")","","","281","","","","117","","","","(713",")","","","164"],["Fee income related to loan level, back-to-back swaps","","","\u2014","","","","1,620","","","","5,799","","","","(1,620",")","","","(4,179",")"],["Gains/(losses) on loans held for sale at lower of cost or fair value","","","1,142","","","","7,426","","","","(10",")","","","(6,284",")","","","7,436"],["Gain on sale of SBA loans","","","4,939","","","","1,766","","","","2,145","","","","3,173","","","","(379",")"],["Corporate advisory fee income","","","3,483","","","","265","","","","444","","","","3,218","","","","(179",")"],["Loss on swap termination","","","(842",")","","","\u2014","","","","\u2014","","","","(842",")","","","\u2014"],["Other income","","","1,733","","","","508","","","","574","","","","1,225","","","","(66",")"],["Total other income","","$","19,256","","","$","20,899","","","$","16,333","","","$","(1,643",")","","$","4,566"]] [[/GREPCENT_TABLE]] 2021 compared to 2020 The Company recorded total other income, excluding wealth management fee income, of $19.3 million in 2021, reflecting a decrease of $1.6 million, or 8 percent, compared to 2020 levels. The decrease for 2021 was primarily attributable to a $7.4 million gain on sale of $355.0 million of PPP loans in 2020 partially offset by an increase of $3.7 million in capital market activity (mortgage banking income, fee income related to loan level, back-to-back swaps, corporate advisory fee income and gain on sale of SBA loans).   Income from the sale of newly originated residential mortgages loans decreased $1.1 million to $2.2 million for the year ended December 31, 2021 when compared to $3.3 million for the same period in 2020.  This decrease was a result of the decreased volume of residential mortgage loans originated for sale during 2021 due to a slowdown in refinance and home purchase activity. The Company did not record any fee income related to loan level, back-to-back swaps during the twelve months ended December 31, 2021 compared to $1.6 million in 2020. The decrease was a result of decreased demand for this product due to the rate environment in 2021.  The program provides a borrower with a degree of interest rate protection on a variable rate loan, while still providing an adjustable rate to the Company, thus helping to manage the Company’s interest rate risk, while contributing to income.  The Company expects back-to-back swap activity will continue to be minimal in the current rate environment. The Company provides loans that are partially guaranteed by the SBA, to provide working capital and/or finance the purchase of equipment, inventory or commercial real estate and that could be used for start-up business.  All SBA loans are underwritten and documented as prescribed by the SBA.  The Company generally sells the guaranteed portion of the SBA 47 loans in the secondary market, with the non-guaranteed portion of SBA loans held in the loan portfolio.  Gain on sale of SBA loans for 2021 increased by $3.2 million to $4.9 million of income related to the Company’s SBA lending and sale program from $1.8 million in 2020.  The 2021 period 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 $3.5 million for 2021 compared to $265,000 for 2020.  2021 included two major corporate advisory/investment banking acquisition transactions.  These transactions tend to be larger and take longer to complete. Income from the back-to-back swap, corporate advisory fee income and SBA programs are dependent on volume, and thus are not linear from year to year, as some years will be higher than others. During 2021 the Company recognized a loss on the termination of $842,000 for two interest rate swaps that had a notional value of $40 million with a weighted average cost of 1.50 percent. The Company recorded $455,000 of additional income related to the net life insurance death benefit under its bank owned life insurance (“BOLI”) policies during 2021. During the year ended December 31, 2021, the Company recorded a $1.1 million gain on sale on the sale of $57 million of PPP loans to a third party to create additional capacity to process our strong loan pipeline. Other income included $886,000 of fee income related to the referral of PPP loans to the same party that the Company sold the PPP loans. The twelve months ended December 31, 2021 included a gain on sale of an other real estate owned (“OREO”) property of $51,000. The remainder of the increase for the year ended December 31, 2021 when compared to 2020 was primarily due to an increase in commercial lending fees primarily unused credit line fees, loan servicing income and letter of credit fees. OPERATING EXPENSES:  The following table presents the major components of operating expenses: [[GREPCENT_TABLE]] [["","","Years Ended December 31,","","","Change"],["(In thousands)","","2021","","","2020","","","2019","","","2021 vs 2020","","","2020 vs 2019"],["Compensation and employee benefits","","$","81,864","","","$","77,516","","","$","70,129","","","$","4,348","","","$","7,387"],["Premises and equipment","","","17,165","","","","16,377","","","","14,735","","","","788","","","","1,642"],["FDIC assessment","","","2,071","","","","1,975","","","","277","","","","96","","","","1,698"],["Other operating expenses:"],["Professional and legal fees","","","5,343","","","","4,099","","","","4,506","","","","1,244","","","","(407",")"],["Telephone","","","1,323","","","","1,432","","","","1,361","","","","(109",")","","","71"],["Advertising","","","1,288","","","","1,631","","","","1,363","","","","(343",")","","","268"],["Amortization of intangible assets","","","1,598","","","","1,287","","","","1,043","","","","311","","","","244"],["Branch restructure","","","228","","","","488","","","","\u2014","","","","(260",")","","","488"],["FHLB prepayment penalty","","","\u2014","","","","4,784","","","","\u2014","","","","(4,784",")","","","4,784"],["Valuation allowance loans held for sale","","","\u2014","","","","4,425","","","","\u2014","","","","(4,425",")","","","4,425"],["Swap valuation allowance","","","2,243","","","","\u2014","","","","\u2014","","","","2,243","","","","\u2014"],["Write-off of subordinated debt costs","","","648","","","","\u2014","","","","\u2014","","","","648","","","","\u2014"],["Other operating expenses","","","12,396","","","","10,945","","","","11,434","","","","1,451","","","","(489",")"],["Total operating expense","","$","126,167","","","$","124,959","","","$","104,848","","","$","1,208","","","$","20,111"]] [[/GREPCENT_TABLE]] 48 2021 compared to 2020 Operating expenses totaled $126.2 million in 2021, compared to $125.0 million in 2020, reflecting an increase of $1.2 million, or 1 percent.  Increased operating expenses in 2021 were principally attributable to:  compensation and employee benefits increase of $4.3 million which includes expenses related to the Lucas and Noyes team lift outs completed in December 2020; expenses related to the acquisition of PPSG completed on July 1, 2021; hiring in line with the Company’s strategic plan and normal salary increases; swap valuation allowance of $2.2 million, and $648,000 for the write-off of subordinated debt costs, which were partially offset by 2020 expenses of $4.4 million for valuation allowance for a loan held for sale; $4.8 million for the prepayment of FHLB advances; $278,000 for the closure of a retail branch; and $210,000 for the consolidation of two private banking locations. INCOME TAXES:  Income tax expense for the year ended December 31, 2021 was $21.0 million as compared to $5.8 million for 2020.  The effective tax rate for the year ended December 31, 2021 was 27.09 percent as compared to 18.16 percent for the year ended December 31, 2020.  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 $23.0 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 financial strength and the ability to support future growth and is essential to executing the Company’s Strategic Plan – “Expanding Our Reach.” The Company’s capital strategy is intended to provide stability to expand its businesses, even in stressed environments. Quarterly stress testing is integral to the Company’s capital management process. The Company strives to maintain capital levels in excess of internal “triggers” and in excess of those considered to be well capitalized under regulatory guidelines applicable to banks and bank holding companies. Maintaining an adequate capital position supports the Company’s goal of providing shareholders an attractive and stable long-term return on investment. The Company’s capital position during 2021 was benefitted by net income of $56.6 million partially offset by the purchase of shares of $28.6 million through the Company’s stock repurchase program and a change in unrealized loss on securities, net of tax of $15.4 million. The Company employs quarterly capital stress testing – adverse case and severely adverse case.  In the most recent completed stress test on September 30, 2021, under severely adverse case, no growth scenarios, the Bank remains well capitalized over a two-year stress period.  With a Pandemic stress overlay, the Bank still remains well capitalized over the two-year stress period. At December 31, 2021, the Company’s GAAP capital as a percent of total assets was 8.99 percent.  At December 31, 2021, the Company’s regulatory leverage, common equity tier 1, tier 1 and total risk-based capital ratios were 8.29 percent, 10.62 percent, 10.62 percent and 14.64 percent, respectively.  At December 31, 2021, the Bank’s regulatory leverage, common equity tier 1, tier 1 and total risk-based capital ratios were 9.99 percent, 12.80 percent, 12.80 percent and 14.05 percent, respectively.  The Company’s and the Bank’s regulatory capital ratios are all above the ratios to be considered well capitalized under regulatory guidance. As a result of the enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies were required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion.  A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes.  The federal banking agencies set the minimum capital for the new Community Bank Leverage Ratio at 9 percent, effective January 1, 2020.  Under the CARES Act, the Community Bank Leverage Ratio was temporarily lowered to 8 percent.  The Bank did not opt into the CBLR and will continue to comply with the requirements under Basel III. The Bank’s leverage ratio was 9.99 percent at December 31, 2021. 49 To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, common equity Tier I and Tier I leverage ratios as set forth in the table. The Bank’s regulatory capital amounts and ratios are presented in the following table: [[GREPCENT_TABLE]] [["","","","","","","","","","","To Be Well","","","","","","For Capital"],["","","","","","","","","","","Capitalized Under","","","For Capital","","","Adequacy Purposes"],["","","","","","","","","","","Prompt Corrective","","","Adequacy","","","Including Capital"],["","","Actual","","","Action Provisions","","","Purposes","","","Conservation Buffer (A)"],["(Dollars in thousands)","","Amount","","","Ratio","","","Amount","","","Ratio","","","Amount","","","Ratio","","","Amount","","","Ratio"],["As of December 31, 2021:"],["Total capital"],["(to risk-weighted assets)","","$","672,614","","","","14.05","%","","$","478,628","","","","10.00","%","","$","382,902","","","","8.00","%","","$","502,559","","","","10.50","%"],["Tier I capital"],["(to risk-weighted assets)","","","612,762","","","","12.80","","","","382,902","","","","8.00","","","","287,177","","","","6.00","","","","406,834","","","","8.50"],["Common equity tier I"],["(to risk-weighted assets)","","","612,738","","","","12.80","","","","311,108","","","","6.50","","","","215,382","","","","4.50","","","","335,039","","","","7.00"],["Tier I capital"],["(to average assets)","","","612,762","","","","9.99","","","","306,538","","","","5.00","","","","245,231","","","","4.00","","","","245,231","","","","4.00"],["As of December 31, 2020:"],["Total capital"],["(to risk-weighted assets)","","$","600,478","","","","14.81","%","","$","405,587","","","","10.00","%","","$","324,469","","","","8.00","%","","$","425,866","","","","10.50","%"],["Tier I capital"],["(to risk-weighted assets)","","","549,575","","","","13.55","","","","324,469","","","","8.00","","","","243,352","","","","6.00","","","","344,749","","","","8.50"],["Common equity tier I"],["(to risk-weighted assets)","","","549,540","","","","13.55","","","","263,631","","","","6.50","","","","182,514","","","","4.50","","","","283,911","","","","7.00"],["Tier I capital"],["(to average assets)","","","549,575","","","","9.71","","","","283,083","","","","5.00","","","","226,466","","","","4.00","","","","226,466","","","","4.00"]] [[/GREPCENT_TABLE]] 50 The Company’s regulatory capital amounts and ratios are presented in the following table: [[GREPCENT_TABLE]] [["","","","","","","","","","","To Be Well","","","","","For Capital"],["","","","","","","","","","","Capitalized Under","","For Capital","","","Adequacy Purposes"],["","","","","","","","","","","Prompt Corrective","","Adequacy","","","Including Capital"],["","","Actual","","","Action Provisions","","Purposes","","","Conservation Buffer (A)"],["(Dollars in thousands)","","Amount","","","Ratio","","","Amount","","Ratio","","Amount","","","Ratio","","","Amount","","","Ratio"],["As of December 31, 2021:"],["Total capital"],["(to risk-weighted assets)","","$","700,790","","","","14.64","%","","N/A","","N/A","","$","382,944","","","","8.00","%","","$","502,614","","","","10.50","%"],["Tier I capital"],["(to risk-weighted assets)","","","508,231","","","","10.62","","","N/A","","N/A","","","287,208","","","","6.00","","","","406,878","","","","8.50"],["Common equity tier I"],["(to risk-weighted assets)","","","508,207","","","","10.62","","","N/A","","N/A","","","215,406","","","","4.50","","","","335,076","","","","7.00"],["Tier I capital"],["(to average assets)","","","508,231","","","","8.29","","","N/A","","N/A","","","245,242","","","","4.00","","","","245,242","","","","4.00"],["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"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","(A)","The Basel Rules require the Company and the Bank to maintain a 2.5 percent \u201ccapital conservation buffer\u201d 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."]] [[/GREPCENT_TABLE]] 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 three percent discount to market.  On January 30, 2019, the Company eliminated the three percent discount feature. Voluntary share purchases in the “Reinvestment Plan” can be filled from the Company’s authorized but unissued shares and/or in the open market, at the discretion of the Company.  All shares purchased through the Plan in both 2021 and 2020 were purchased in the open market.   Management believes the Company’s capital position and capital ratios are adequate. Further, Management believes the Company has sufficient common equity to support its planned growth for the immediate future. The Company continually assesses other potential sources of capital to support future growth. LIQUIDITY:  Liquidity refers to an institution’s ability to meet short-term requirements including funding of loans, deposit withdrawals and maturing obligations, as well as long-term obligations, including potential capital expenditures. The Company’s liquidity risk management is intended to ensure the Company has adequate funding and liquidity to support its assets across a range of market environments and conditions, including stressed conditions. Principal sources of liquidity include cash, temporary investments, securities available for sale, customer deposit inflows, loan repayments and secured borrowings.  Other liquidity sources include loan sales and loan participations. Management actively monitors and manages the Company’s liquidity position and believes it is sufficient to meet future needs. Cash and cash equivalents, including federal funds sold and interest-earning deposits, totaled $146.8 million at 51 December 31, 2021. In addition, the Company had $796.8 million in securities designated as available for sale at December 31, 2021. These securities can be sold, or used as collateral for borrowings, in response to liquidity concerns. Available for sale and held to maturity securities with a carrying value of $764.4 million and $108.7 million, as of December 31, 2021, respectively, were pledged to secure public funds and for other purposes required or permitted by law.  However, only $33.0 million of that total is actually encumbered.  In addition, the Company generates significant liquidity from scheduled and unscheduled principal repayments of loans and mortgage-backed securities. As of December 31, 2021, the Company had approximately $1.8 billion of secured funding available from the FHLB and had $1.2 billion of secured funding available from the Federal Reserve Discount Window, none of which was drawn. Brokered interest-bearing demand (“overnight”) deposits decreased $25.0 million to $85.0 million at December 31, 2021.  The interest rate paid on these deposits allows the Bank to fund operations at attractive rates and engage in interest rate swaps to hedge its asset-liability interest rate risk.  The Company ensures ample available collateralized liquidity as a backup to these short-term brokered deposits.  As of December 31, 2021, the Company has transacted pay fixed, receive floating interest rate swaps totaling $230.0 million in notional amount.   The Company has a Board-approved Contingency Funding Plan. This plan provides a framework for managing adverse liquidity stress and contingent sources of liquidity. The Company conducts liquidity stress testing on a regular basis to ensure sufficient liquidity in a stressed environment.  The Company believes it has sufficient liquidity given the current environment created by the COVID-19 pandemic. Peapack-Gladstone Financial Corporation is a separate legal entity from the Bank and must provide for its own liquidity to pay dividends to its shareholders, to repurchase shares of its common stock, and for other corporate purposes. Peapack-Gladstone Financial Corporation’s primary source of income is dividends received from the Bank. The Bank’s ability to pay dividends is governed by applicable law. In December 2020, the Company issued the 2020 Notes to certain institutional investors and retained $98.2 million of proceeds.  At December 31, 2021, Peapack-Gladstone Financial Corporation (unconsolidated basis) had liquid assets of $28.1 million. Management believes the Company’s liquidity position and sources are adequate. EFFECTS OF INFLATION AND CHANGING PRICES:  The financial statements and related financial data presented herein have been prepared in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.  Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature.  As a result, interest rates have a more significant impact on a financial institution’s performance than do general levels of inflation. 52 PEAPACK PRIVATE: This division includes:  investment management services provided for individuals and institutions; personal trust services, including services as executor, trustee, administrator, custodian and guardian, and other financial planning, tax preparation and advisory services.  Officers from Peapack Private are available to provide wealth management, trust and investment services at the Bank’s headquarters in Bedminster, at private banking locations in Morristown, New Providence, Princeton, Red Bank, Summit and Teaneck, New Jersey and at the Bank’s subsidiaries, PGB Trust & Investments of Delaware in Greenville, Delaware and Murphy Capital, in Bedminster, New Jersey. The following table presents certain key aspects of the Peapack Private’s performance for the years ended December 31, 2021, 2020 and 2019. [[GREPCENT_TABLE]] [["","","Years Ended December 31,","","","Change"],["(In thousands)","","2021","","","2020","","","2019","","","2021 vs 2020","","","2020 vs 2019"],["Total fee income","","$","52,987","","","$","40,861","","","$","38,363","","","$","12,126","","","$","2,498"],["Compensation and benefits (included in"],["Operating Expenses section above)","","","24,894","","","","23,472","","","","21,204","","","","1,422","","","","2,268"],["Other operating expense (included in"],["Operating Expenses section above)","","","13,020","","","","11,718","","","","10,977","","","","1,302","","","","741"],["Assets under management and/or"],["administration (AUM) (market value)","","11.1 billion","","","8.8 billion","","","7.5 billion"]] [[/GREPCENT_TABLE]] 2021 compared to 2020 The market value of assets under management and/or administration (“AUM”) at December 31, 2021 and 2020 was $11.1 billion and $8.8 billion, respectively, an increase of 26 percent. This includes assets held at the Bank at December 31, 2021 and 2020 of $275.6 million and $329.9 million, respectively.  Effective December 18, 2020, the Bank completed the hires of the teams from Lucas, based in Red Bank, New Jersey, and from Noyes, based in New Vernon, New Jersey, which combined contributed approximately $400 million of AUM/AUA at the time of acquisition.  Effective July 1, 2021, the Bank closed on the acquisition of 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. Peapack Private management fees increased $12.1 million, or 30 percent, to $53.0 million for the year ended December 31, 2021 from $40.9 million in 2020.  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.   Peapack Private expenses increased to $37.9 million for the year ended December 31, 2021 from $35.2 million for 2020, an increase of $2.7 million, or 8 percent. Other operating expenses increased $1.3 million, or 11 percent to $13.0 million for the year ended 2021 when compared to 2020. Compensation and benefits expense totaled $24.9 million and $23.5 million for the years ended December 31, 2021 and 2020, respectively, increasing $1.4 million or 6 percent.  Operating expenses relative to Peapack Private reflected increases due to overall growth in the business, new hires and acquisitions.  Remaining expenses are in line with the Company’s Strategic Plan, particularly the hiring of key management and revenue-producing personnel.   Peapack Private currently generates adequate revenue to support the salaries, benefits and other expenses of the wealth division and Management believes it will continue to do so as the Company grows organically and/or by acquisition. Management believes that the Bank generates adequate liquidity to support the expenses of Peapack Private should it be necessary. 53