PEAPACK GLADSTONE FINANCIAL CORP (PGC) FY 2022 MD&A

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.

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Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to:

•
our ability to successfully grow our business and implement our strategic plan, including our ability to generate revenues to offset the increased personnel and other costs related to the strategic plan;

•
the impact of anticipated higher operating expenses in 2023 and beyond;

•
our ability to successfully integrate wealth management firm acquisitions;

•
our ability to manage our growth;

•
our ability to successfully integrate our expanded employee base;

•
an unexpected decline in the economy, in particular in our New Jersey and New York market areas, including potential recessionary conditions;

•
declines in our net interest margin caused by the interest rate environment and/or our highly competitive market;

•
declines in the value in our investment portfolio;

•
impact from the pandemic event on our business, operations, customers, allowance for credit losses and capital levels;

•
the continuing impact of the COVID-19 pandemic on our business and results of operation;

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higher than expected increases in our allowance for credit losses;

•
higher than expected increases in credit losses or in the level of delinquent, nonperforming, classified and criticized loans;

•
inflation and changes in interest rates, which may adversely impact our margins and yields, reduce the fair value of our financial instruments, reduce our loan originations and lead to higher operating costs;

•
decline in real estate values within our market areas;

•
legislative and regulatory actions (including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Basel III and related regulations) that may result in increased compliance costs;

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monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System;

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successful cyberattacks against our IT infrastructure and that of our IT and third-party providers;

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adverse weather conditions;

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the current or anticipated impact of military conflict, terrorism or other geopolitical events;

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government shutdowns or a default by the U.S. on its debt obligations;

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our inability to successfully generate new business in new geographic markets;

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a reduction in our lower-cost funding sources;

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our inability to adapt to technological changes;

•
claims and litigation pertaining to fiduciary responsibility, environmental laws and other matters;

•
our inability to retain key employees;

•
demands for loans and deposits in our market areas;

•
adverse changes in securities markets;

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changes in governmental regulation, including, but not limited to, any increase in FDIC insurance premiums and changes in the monetary policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System;

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changes in accounting policies and practices; and

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other unexpected material adverse changes in our operations or earnings.

Except as may be required by applicable law or regulation, the Company undertakes no duty to update any forward-looking 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, 2022, the Company recorded net income of $74.2 million, and diluted earnings per share of $4.00 compared to $56.6 million and $2.93, respectively, for 2021, reflecting increases of $17.6 million, or 31 percent, and $1.07 per share, or 37 percent, respectively. During 2022, 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

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business. The Strategic Plan calls 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 2022:

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At December 31, 2022, the market value of assets under management and/or administration at Peapack Private was $9.9 billion.

•
Wealth Management fee income of $54.7 million for 2022, which comprised 23 percent of total revenue for the year.

•
The net interest margin improved to 2.91 percent for the twelve-month period ended December 31, 2022 compared to 2.38 percent for the twelve-month period ended December 31, 2021.

•
Total loans increased by $479 million, or 10%, to 5.3 billion at December 31, 2022 compared to $4.8 billion at December 31, 2021.

•
At December 31, 2022, total C&I loans (including equipment finance loans) comprised 42 percent of the total loan portfolio.

•
Noninterest-bearing demand deposits comprised 24 percent of total deposits as of December 31, 2022.

•
Core deposits (which includes noninterest-bearing demand and interest-bearing demand, savings and money market accounts) totaled 92 percent of total deposits at December 31, 2022.

•
Asset quality metrics continued to be strong at December 31, 2022. Nonperforming assets at December 31, 2022 were $19.1 million, or 0.30 percent of total assets. Total loans past due 30 through 89 days and still accruing were $7.6 million or 0.14 percent of total loans at December 31, 2022.

•
The Company and the Bank’s capital ratios at December 31, 2022 remain well above regulatory well capitalized standards.

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 credit 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.

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

Although Management uses the best information available, the level of the allowance for credit losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for credit losses. Such agencies may require the Company to make additional provisions for credit losses based upon information available to them at the time of their examination.

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Furthermore, the majority of the Company's loans are secured by real estate in new Jersey and, to a lesser extent, New York City. Accordingly, the collectability of a substantial portion of the carrying value of the Company's loan portfolio is susceptible to changes in local market conditions and any adverse economic conditions. Future adjustments to the provision for credit losses and allowance for credit losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company's control.

The Company’s quantitative component of allowance for credit losses for collectively evaluated loans is calculated with an economic forecast sourced from Moody’s. Management performed a hypothetical sensitivity analysis to understand the impact of changes in the economic forecast as a key input on our allowance for credit losses for collectively evaluated loans. Within the various economic scenarios considered for this hypothetical sensitivity analysis, as of December 31, 2022, the quantitative estimate of the allowance for credit loss for collectively evaluated loans would increase by approximately $12 million under sole consideration of an adverse Moody’s economic forecast, which stressed the national unemployment rate to 8 percent and negative growth for national GDP to approximately 2 percent. The hypothetical sensitivity calculation reflects the sensitivity of the modeled allowance estimate to macroeconomic forecast data but lacks other qualitative overlays and other qualitative adjustments that are part of the quarterly allowance process. As such, this does not necessarily reflect the nature and extent of future changes in the allowance for reasons including increases or decreases in qualitative adjustments, changes in the risk profile, size and composition of the loan portfolio, changes in the severity of the macroeconomic scenario and the range of scenarios under management consideration.

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

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EARNINGS SUMMARY: The following table presents certain key aspects of our performance for the years ended December 31, 2022, 2021 and 2020.

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2022 compared to 2021

The Company recorded net income of $74.25 million and diluted earnings per share of $4.00 for the year ended December 31, 2022, compared to net income of $56.62 million and diluted earnings per share of $2.93 for the year ended December 31, 2021. These results produced a return on average assets of 1.20 percent and 0.94 percent for 2022 and 2021, respectively, and a return on average shareholders’ equity of 14.02 percent and 10.56 percent for 2022 and 2021, respectively.

The increase in net income for 2022 was principally driven by the Company’s increased net interest income resulting from loan growth, continued margin expansion, wealth management fee income and increased SBA income. The earnings for 2022 included a $6.6 million loss on the sale of securities as a result of the Company's balance sheet repositioning. Margin expansion was driven by target Federal Funds being increased 400 basis points through 2022, which benefitted the yield on the Company's floating rate loan portfolio; while the Company managed the cost of interest-bearing liabilities so that it increased by a slower rate and a lower amount. Operating expenses increased by $7.6 million due to a full year of expenses associated with the July 2021 acquisition of Princeton Portfolio Strategies Group ("PPSG"), increased corporate and health insurance costs, hiring in line with the Company's strategic plan and normal merit increases. In addition, the Company recorded $201,000 of expense associated with consolidation of private banking offices, and $200,000 of expense related to accelerated restricted stock vesting related to one employee. 2021 expenses included $648,000 of accelerated expense related to the redemption of subordinated debt. The Company recorded swap valuation expense of $673,000 and $2.2 million in 2022 and 2021, respectively. Both 2022 and 2021 included $1.5 million of severance expense related to certain staff reorganizations within several areas of the Bank.

NET INTEREST INCOME AND NET INTEREST MARGIN

The primary source of the Company’s operating income is net interest income, which is the difference between interest and dividends earned on interest-earning assets and fees earned on loans, and interest paid on interest-bearing liabilities. 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 ("NIM") 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.

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The following table compares the average balance sheets, interest rate spreads and net interest margins for the years ended December 31, 2022, 2021 and 2020 (on a fully tax-equivalent basis "FTE"):

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

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

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

4.
Net interest income on an FTE basis as a percentage of total average interest-earning assets.

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

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

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

4.
Net interest income on an FTE basis as a percentage of total average interest-earning assets.

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

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

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

4.
Net interest income on an FTE basis as a percentage of total average interest-earning assets.

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For the years indicated in the table below, there were no "out-of-period items and adjustments." The effect of volume and rate changes on net interest income (on an FTE basis) for the periods indicated are shown below:

2022 compared to 2021

Net interest income, on a fully tax-equivalent basis, grew $38.6 million, or 28 percent, in 2022 to $177.5 million from $138.9 million in 2021. The net interest margin was 2.91 percent and 2.38 percent for the years ended December 31, 2022 and 2021, respectively, an increase of 53 basis points year over year. The growth in net interest income and NIM for the year ended December 31, 2022, when compared to 2021 was due to an increase in the yield on the average balance of interest-earning assets due to the current interest rate environment and an increase in average interest-earning assets of $265.4 million, or 5 percent, to $6.11 billion, offset by an increase in the average balance of interest-bearing liabilities of $81.7 million and an increase in the cost of interest-bearing liabilities of 30 basis points.

NIM also improved, as the Company executed a balance sheet reposition in the first quarter of 2022, whereby the Company added $250.0 million of multifamily loans, funded by the sale of $125.0 million of lower-yielding, like-duration securities, and deposit growth. To manage a neutral overall duration effect on the balance sheet, thereby protecting the balance sheet against the impact of rising rates, we executed $100.0 million of forward starting five-year pay fixed swaps. The repositioning resulted in an attractive earn-back period on the loss on sale of securities, with future net interest margin improving by four basis points, with no impact to tangible capital or tangible book value per share.

The increase in average interest-earning assets was driven by growth of $608.7 million in loans to $5.13 billion in 2022 from $4.52 billion in 2021 as the Company deployed excess liquidity as shown by a decrease of $306.0 million in interest-earning deposits to $171.5 million when comparing the year ended 2022 to 2021.

The growth in loans was driven by growth in commercial mortgages of $446.6 million to $2.48 billion in 2022 when compared to $2.03 billion in 2021 as part of the Company’s balance sheet repositioning executed during the first quarter of 2022 and the use of excess liquidity from the fourth quarter of 2022. Additionally, the average balance of commercial loans grew $165.1 million, or 9 percent, to $2.05 billion in 2022 when compared to $1.88 billion for 2021.

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The average balance of investments was $807.5 million in 2022 compared to $844.8 million for 2021 which reflected a decrease of $37.3 million or 4 percent. During the first quarter of 2022, the Company executed a balance sheet reposition, which included the sale of $125.0 million of investments at lower yields to partially fund like duration, higher-yielding multifamily loans. Normal amortization of the portfolio coupled with the sale resulted in the slight decline in the portfolio.

For the 2022 and 2021 periods, the average yields earned on interest-earning assets were 3.49 percent and 2.76 percent, respectively, an increase of 73 basis points. The increase in yields on interest-earning assets was primarily due to the increase in target Federal Funds rate of 400 basis points. This resulted in an increase of yield on loans of 54 basis points to 3.83 percent for 2022. The yield on interest-earning deposits increased 150 basis points to 1.61 percent for 2022. Further, the balance of interest-earning deposits decreased significantly which helped to improve the average yield on interest-earning assets as the Bank utilized excess liquidity to originate loans and for security purchases during the latter half of 2022.

The average yield on total loans increased 54 basis points to 3.83 percent for 2022 compared to 3.29 percent for 2021. This increase was driven by an increase in yield on commercial loans of 87 basis points to 4.41 percent for 2022, due to an increase in target Federal Funds rate of 400 basis points during 2022 given these loans are typically floating rates with short repricing periods. The yield on commercial mortgages was 3.53 percent for 2022 compared to 3.11 percent for 2021 reflecting an increase of 42 basis points. This increase was due to the originations of loans with higher yields during 2022. In addition, 23 percent of our loans reprice within one month; 35 percent within three months and 45 percent within one year. The increases in the average balances of commercial loans and commercial mortgages were partially funded by the balance sheet repositioning completed in the first quarter of 2022 and the use of the Company's excess liquidity as seen by the decline in interest-earning deposits of $306.0 million when comparing the 2022 and 2021 period.

During 2022 and 2021, the Company recorded yield on investments of 1.73 percent and 1.41 percent, respectively. The increase in yield was due to the Company strategically purchasing higher yielding investments during 2022 in anticipation of maturities and to utilize excess liquidity.

The average balance of interest-bearing liabilities totaled $4.45 billion for 2022 representing an increase of $81.7 million or 2 percent from $4.37 billion in 2021. The increase in interest-bearing liabilities reflected growth of interest-bearing deposits of $190.2 million to $4.29 billion in 2022 from $4.10 billion in 2021; offset by decreases in the average balance of borrowings of $83.4 million from $110.1 million in 2021 to $26.6 million in 2022 and $24.0 million in the average balance of subordinated debt to $132.8 million in 2022.

The increase in the average balance of interest-bearing deposits was due to growth in customer deposits (excluding brokered CDs and brokered interest-bearing demand deposits but including reciprocal funds discussed below) of $206.3 million to $4.18 billion for 2022 from $3.97 billion in 2021. The increase was due to an increase in retail deposits from our branch network; an increase in interest-bearing check deposits as maturing CDs shifted into these accounts; a focus on providing high-touch client service; new deposit relationships related to PPP; and a full array of treasury management products that support core deposit growth. This growth was partially offset by a decline of $16.1 million in the average balance of brokered deposits and $86.8 million in the average balance of retail CDs.

The Company is a participant in the Reich & Tang demand Deposit Marketplace ("DDM") program and the Promontory Program. The Company uses these deposit sweep services to place customer funds into interest-bearing demand (checking) accounts issued by other participating banks. Customer funds are placed at one of more participating banks to ensure that each deposit customer is eligible for the full amount of FDIC insurance. As a participant, the Company receives reciprocal amounts of deposits from other participating banks. Such reciprocal deposit balances were $662.0 million and $732.0 million for 2022 and 2021, respectively.

The decrease in borrowings of $83.4 million to $26.6 million for 2022 was principally due to the Company's participation in the Paycheck Protection Program Loan Facility in 2021 to fund PPP loans originations, which decreased due to PPP loan forgiveness that occurred during the latter part of 2021, offset by a slight increase in overnight borrowings.

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.

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The cost of interest-bearing liabilities was 80 basis points and 50 basis points for 2022 and 2021, respectively, reflecting an increase of 30 basis points. The increase was driven by an increase in the average cost of interest-bearing deposits of 34 basis points to 69 basis points for 2022. Although the Federal Reserve raised target Federal Funds rate 400 basis points, the Company has been able to maintain lower deposit rates as our high touch client service has provided a competitive advantage in the pricing of our deposit accounts. The cost of borrowings increased by 182 basis points to 2.25 percent. The average cost of interest-bearing liabilities was also affected by a decline in the cost of subordinated debt of 37 basis points to 4.10 percent for 2022.

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 as incurred.

At December 31, 2022, the Company had investment securities held to maturity with a carrying cost of $102.3 million and an estimated fair value of $87.2 million compared with a carrying cost of $108.7 million and an estimated fair value of $108.5 million at December 31, 2021.

At December 31, 2022, the Company had investment securities available for sale with an estimated fair value of $554.6 million compared with $796.8 million at December 31, 2021. The decrease was due to the sale of residential mortgage-backed securities and U.S. government-sponsored agencies of $121.2 million associated with a balance sheet repositioning executed in the first quarter of 2022. The decrease was also due to an increase in the unrealized loss due to the rising interest rate environment experienced during 2022. A net unrealized loss (net of income tax) of $81.0 million and a net unrealized gain (net of income tax) of $9.9 million were included in shareholders’ equity at December 31, 2022 and 2021, respectively.

The Company had one equity security (a CRA investment security) with a fair value of $13.0 million and $14.7 million at December 31, 2022 and 2021, respectively. The Company recorded a $1.7 million unrealized loss in securities gains/losses, net, on the Consolidated Statements of Income for the year ended December 31, 2022, as compared to a $432,000 unrealized loss for the year ended December 31, 2021 related to the change in the market value of the equity security.

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The amortized cost and fair value of investment securities held to maturity and available for sale at December 31, 2022, 2021 and 2020 are shown below:

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The following table presents the contractual maturities and yields of debt securities held to maturity and available for sale as of December 31, 2022. The weighted average yield is a computation of income within each maturity range based on the amortized cost of securities:

(1)
Shown using stated final maturity

(2)
Yields presented on a fully tax-equivalent basis, using a 21 percent federal income tax.

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 2022 was $171.5 million compared to $477.5 million in 2021.

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. The Company also offers equipment financing loan and leases that are originated nationally. As of December 31, 2022, 42 percent of the total loan portfolio was concentrated in C&I loans (including equipment financing), 35 percent in multifamily loans and 12 percent in commercial mortgages.

Total loans were $5.29 billion and $4.81 billion at December 31, 2022 and 2021, respectively, an increase of $478.5 million, over the previous year. Multifamily mortgage loans were $1.86 billion at December 31, 2022, an increase of $268.0 million or 17 percent when compared to $1.60 billion at December 31, 2021 due to increased originations and the balance sheet repositioning executed in the first quarter of 2022. During 2022, commercial mortgages decreased $38.0 million due to increased paydowns compared to 2021. Commercial loans, which includes equipment financing, totaled $2.19 billion at December 31, 2022. This was an increase of $238.9 million, or 12 percent, when compared to December 31, 2021. The increase in commercial loans was due to higher levels of equipment financing originations, which resulted in origination growth of $210.2 million to $965.6 million for 2022.

The Company originates 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 start-up and smaller 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 2022, the Bank sold $56.0 million of the guaranteed portion of SBA loans into the secondary market. As of December

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31, 2022, the balance of the non-guaranteed portion of SBA loans held on our balance sheet totaled $40.6 million and is included in commercial loans.

The following table presents the contractual repayments of the loan portfolio, by loan type, at December 31, 2022:

The following table presents the loans, by loan type, that have a fixed interest rate and an adjustable interest rate due after one year:

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, 2022 is as follows:

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A further breakdown of the multifamily portfolio by county within each respective State is as follows:

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, 2022 are:

Principal types of non-owner occupied commercial real estate properties (by Call Report code), at December 31, 2022 are as follows. These loans are included in commercial mortgage loans and commercial loans on the Company’s balance sheet.

At December 31, 2022 and 2021, 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, 2022 and 2021:

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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.

GOODWILL: At December 31, 2022 and 2021, goodwill remained $36.2 million. The Bank intends to continue to grow its wealth management business through growth in existing relationships, attraction of new clients and acquisitions, which could result in additional goodwill.

DEPOSITS: At December 31, 2022 and 2021, the Company reported total deposits of $5.21 billion and $5.27 billion, a decrease of $61.0 million, or 1 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 had large deposit outflows of $142 million in the second half of 2022, which included several large relationships strategically utilizing their funds, including transferring funds to our Wealth Management business, acquisitions, further investing in their business, and purchasing real estate and other investments. The Company’s average deposits for 2022 increased $338.2 million, or 7 percent, over 2021 average levels to $5.40 billion. The Company saw the largest average balance growth in noninterest-bearing demand and interest-bearing checking balances. During the third quarter of 2022, the Company successfully migrated $287 million of interest-bearing checking into noninterest-bearing demand deposits, partially offset by clients utilizing funds for business operations. The average balance growth in customer deposits (excluding brokered CDs and brokered interest-bearing demand deposits, but including reciprocal funds discussed below) was driven by several factors including 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:

•
Growth in deposits associated with its private banking relationships, including lending activities; and

•
Business and personal core deposit generation, particularly noninterest-bearing demand and checking.

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 $25.0 million to $60.0 million at December 31, 2022 from $85.0 million at the same period in 2021. The Company ensures ample available collateralized liquidity as a backup to these short-term brokered deposits. At December 31, 2022, the Company had transacted pay fixed, receive floating interest rate swaps totaling $390.0 million in notional amount, which included $100.0 million of forward-starting swaps 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:

Reciprocal deposits of $620.1 million, $647.8 million and $652.5 million are included in the Company’s interest-bearing checking deposits as of December 31, 2022, 2021, and 2020, respectively.

At December 31, 2022, the Company does carry deposits that exceed the FDIC insurance limit of $250,000. At December 31, 2022, we had no deposits that were uninsured for any reason other than being in excess of the maximum amount for federal deposit insurance.

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The following table shows the maturity for certificates of deposit of $250,000 or more as of December 31, 2022 (in thousands):

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 "FHLB").

At December 31, 2022 the Company had $379.5 million of overnight borrowings at the FHLB at a rate of 4.61 percent compared to no overnight borrowings at December 31, 2021 or 2020.

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 borrowings from the PPPLF of $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, 2022, unused short-term or overnight borrowing commitments totaled $1.5 billion from the FHLB, $22.0 million from correspondent banks and $1.8 billion from the Federal Reserve Bank.

SUBORDINATED DEBT: 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 had a fixed interest 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.

The Company used the proceeds from the issuance of the 2020 Notes to refinance then-outstanding debt, for stock repurchases, acquisitions of wealth management firms, as well as other general corporate purposes.

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.

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ALLOWANCE FOR CREDIT LOSSES AND RELATED PROVISION: The allowance for credit losses was $60.8 million at December 31, 2022 compared to $61.7 million at December 31, 2021. The decline in the allowance for credit losses ("ACL") was primarily due to the Day 1 reduction of $5.5 million recorded in connection with the implementation of CECL on January 1, 2022, and net charge-offs of $1.2 million partially offset by the 2022 provision for credit losses of $6.4 million. At December 31, 2022, the allowance for credit losses as a percentage of total loans outstanding was 1.15 percent compared to 1.28 percent at December 31, 2021. The provision for credit losses was $6.4 million for 2022, $6.5 million for 2021 and $32.4 million for 2020. The allowance for credit loss ratio declined due to the Day 1 reduction and a 2022 provision for credit losses based on 2022 loan growth in lower risk segments that carry lower ACL coverage.

In determining an appropriate amount for the allowance, the Bank segments and aggregates the loan portfolio based on common characteristics. The following segments have been identified:

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. 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 (“LTV”) 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 $1,089,300 for retail customers to 75 percent for loan amounts to $3 million for customers of our wealth management business line. For investment properties, LTVs range from a maximum of 80 percent for loan amounts to $726,200 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 seven 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.

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.

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b)
Junior Lien Loan on Residence (which include home equity lines of credit). The Bank provides junior lien loans (“JLL”) and revolving home equity lines of credit 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 and 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 75 percent for JLLs and 80 percent for home equity lines of credit, 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. 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.

c)
Multifamily Loans. Multifamily loans are commercial mortgages on residential apartment buildings. Within the multifamily sector, the Bank’s 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, 2022, the average property size in the portfolio was 45 units.

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. 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 59 percent at December 31, 2022 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.

d) Owner-Occupied Real Estate Loans. The Bank provides mortgage loans for owner-occupied commercial real estate properties in the Tri-State area and Pennsylvania.

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.

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

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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.

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.

e)
Investment Commercial Real Estate Loans. The Bank provides mortgage loans for properties managed as an investment property (non-owner-occupied) in the Tri-State area and Pennsylvania.

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.

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.

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 as well as the stock of the company, if privately held. In addition, these loans often include commercial real estate as collateral to strengthen the Bank’s 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.

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.

g)
Leasing and Equipment Finance. Peapack Capital Corporation (“PCC”), 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

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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.

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.

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.

h) Construction. The Bank provides commercial construction loans for properties located in the Tri-state area. Risks common to commercial construction loans are cost overruns, changes in market demand for property, inadequate long-term financing arrangements and declines in real estate values. Changes in market demand for property could lead to longer marketing times resulting in higher carrying costs, declining values, and higher interest rates.

i) 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.

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.

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

The adoption of CECL resulted in a day 1 reduction of $5.5 million. The lower allowance was in part attributed to historically low charge-offs combined with the shorter duration of the loan portfolio employed in our CECL analysis. Further, the incurred loss method required significant qualitative factors, including factors related to COVID-19, and the use of a multiplier for potential losses on criticized and classified loans, neither of which are included within the CECL methodology. The CECL methodology utilizes less qualitative factors as it uses economic factors and considers relevant available information from internal and external sources related to past events and calculates losses based on discounted cash flows on

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an individual loan basis. Accordingly, the CECL model quantitatively accounts for some of the qualitative factors utilized in the incurred loss methodology.

The following table presents the credit loss experience, by loan type, during the years ended December 31:

(A)
Commencing on January 1, 2022, the allowance calculation is based on the CECL methodology. Prior to January 1, 2022, the calculation was based on the incurred loss methodology. Provision to roll forward the ACL excludes a provision of $450,000 at December 31, 2022 related to off-balance sheet commitments.

(B)
The December 31, 2022, 2021 and 2020 ACL coverage ratios include PPP loans of $1.7 million, $13.8 million and $195.6 million, respectively.

The following table shows the allocation of the allowance for credit losses and the percentage of each loan category, by collateral type, to total loans as of December 31, of the years indicated:

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The allowance for credit losses as of December 31, 2022 totaled $60.8 million compared to $61.7 million at December 31, 2021. The allowance for credit losses as a percentage of loans was 1.15 percent as of December 31, 2022 and 1.28 percent as of December 31, 2021. The provision for credit losses for 2022 totaled $6.4 million, which included a provision for off-balance sheet commitments of $450,000 compared with $6.5 million for 2021. The Company believes that the allowance for credit losses as of December 31, 2022, represents a reasonable estimate for probable incurred losses in the portfolio at that date.

The portion of the allowance for credit losses allocated to loans collectively evaluated for impairment, commonly referred to as general reserves, was $59.3 million at December 31, 2022 and $57.5 million at December 31, 2021. General reserves at December 31, 2022 represented 1.12 percent of loans collectively evaluated for impairment compared to 1.20 percent at December 31, 2021. The specific reserves on individually evaluated loans were $1.5 million at December 31, 2022 compared to $4.2 million at December 31, 2021. Specific reserves were largely attributable to a $1.2 million reserve associated with one commercial real estate loan with a large retail component totaling $11.2 million at December 31, 2022.

The allowance for credit losses as a percentage of nonperforming loans decreased to 320.59 percent due to an increase in nonperforming loans and the CECL Day 1 adjustment of $5.5 million. Nonperforming loans increased from $15.6 million to $19.0 million during the year. 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 credit losses does not always change proportionately with changes in nonperforming loans. The Company charged off $1.5 million on loans identified as collateral-dependent individually evaluated loans during 2022 and $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.

ASSET QUALITY: The following table presents various asset quality data at the dates indicated. These tables do not include loans held for sale.

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(1)
Includes $4.5 million outstanding to U.S. governmental entities at December 31, 2022. 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.

(2)
The increase in nonaccrual loans in 2021 was due to 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 higher balance of nonaccrual loans in 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.

At December 31, 2022, 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.

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.

Under this revised guidance, 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. As of December 31, 2022, all of these loans resumed contractual payments and were removed from deferral status.

TROUBLED DEBT RESTRUCTURINGS: The following table presents the troubled debt restructured loans, by collateral type, at December 31, 2022 and 2021:

At December 31, 2022, there were $13.4 million of troubled debt restructured loans included in nonaccrual loans compared to $1.1 million at December 31, 2021. At December 31, 2022, $13.2 million troubled debt restructured loans are considered and included in the individually evaluated loans and had specific reserves of $1.2 million. All $3.6 million of 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.

Except as disclosed, the Company did not have any potential problem loans at December 31, 2022 or December 31, 2021 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.

Loans individually evaluated for impairment totaled $16.7 million and $18.1 million at December 31, 2022 and 2021, respectively. Individually evaluated loans include nonaccrual loans of $15.8 million and $15.6 million at December 31, 2022

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and 2021, respectively. Individually evaluated loans also include accruing troubled debt restructuring loans of $150,000 at December 31, 2022 and $2.5 million at December 31, 2021.

The following table presents impaired loans, by collateral type, at December 31, 2022 and 2021: