PEAPACK GLADSTONE FINANCIAL CORP (PGC) FY 2023 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,”

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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:

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

•
the impact of anticipated higher operating expenses in 2024 and beyond;

•
our ability to successfully integrate wealth management firm acquisitions;

•
our ability to successfully integrate our expanded employee base;

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

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

•
declines in the value in our investment portfolio;

•
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 that may result in increased compliance costs;

•
a potential government shutdown;

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

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

•
our inability to successfully generate new business in new geographic markets, including our expansion into New York City;

•
a reduction in our lower-cost funding sources;

•
changes in liquidity, including the size and composition of our deposit portfolio and the percentage of uninsured deposits in the portfolio;

•
our inability to adapt to technological changes;

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

•
our inability to retain key employees;

•
demand for loans and deposits in our market areas;

•
adverse changes in securities markets;

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

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

•
changes in accounting policies and practices; and/or

•
other unexpected material adverse changes in our operations or earnings.

Except as may be required by applicable law or regulation, the Company undertakes no duty to update any forward-looking 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES: Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Company’s Audited Consolidated Financial Statements contains a summary of the Company’s significant accounting policies.

Management believes that the Company’s policy with respect to the methodology for the determination of the allowance for credit losses involves a higher degree of complexity and requires Management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application are periodically reviewed with the Audit Committee and the Board of Directors.

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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 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 forecasts. 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, among others, 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. The allowance is available for any loan that, in Management’s judgment, should be charged off.

Although Management uses the best information available, the level of the allowance for credit losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for credit losses. Such agencies may require the Company to make additional provisions for credit losses based upon information available to them at the time of their examination. Furthermore, the majority of the Company’s loans are secured by real estate in New Jersey and, to a lesser extent, the boroughs of New York City. Accordingly, the collectability of a substantial portion of the carrying value of the Company’s loan portfolio is susceptible to changes in local market conditions and any adverse economic conditions. Future adjustments to the provision for credit losses and allowance for credit losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control.

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

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, 2023, the Company recorded net income of $48.9 million, and diluted earnings per share of $2.71, compared to $74.2 million and $4.00, respectively, for 2022, reflecting decreases of $25.4 million, or 34 percent, and $1.29 per share, or 32 percent, respectively. During 2023, the Company continued to focus on executing its Strategic Plan, which included ongoing investment in our private banking model. During 2023, the Company also made a strategic decision to expand into New York City by hiring a team of experienced professionals to gain entry into this market. 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 selected highlights from 2023:

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At December 31, 2023, the market value of assets under management and/or administration, through the Peapack Private Wealth Management Team, was $10.9 billion, reflecting an increase of 10 percent from $9.9 billion at December 31, 2022.

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Wealth Management fee income was $55.7 million in 2023, which comprised 24 percent of total revenue for the year.

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Total loans increased by $144 million, or 3 percent, to 5.4 billion at December 31, 2023 compared to $5.3 billion at December 31, 2022.

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At December 31, 2023, total C&I loans (including equipment finance loans) comprised 42 percent of the total loan portfolio.

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•
Noninterest-bearing demand deposits comprised 18 percent of total deposits as of December 31, 2023.

•
Core deposits (which includes noninterest-bearing demand and interest-bearing demand, savings and money market accounts) totaled 89 percent of total deposits at December 31, 2023.

•
Book value per share increased 10 percent to $32.90 at December 31, 2023 from $29.92 at December 31, 2022.

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The Company and the Bank’s capital ratios at December 31, 2023 remain well above regulatory well capitalized standards.

EARNINGS SUMMARY: The following table presents certain key aspects of our performance for the years ended December 31, 2023, 2022 and 2021.

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2023 compared to 2022

The Company recorded net income of $48.85 million and diluted earnings per share of $2.71 for the year ended December 31, 2023, compared to net income of $74.25 million and diluted earnings per share of $4.00 for the year ended December 31, 2022. These results produced a return on average assets of 0.76 percent and 1.20 percent for 2023 and 2022, respectively, and a return on average shareholders’ equity of 8.77 percent and 14.02 percent for 2023 and 2022, respectively.

The decrease in net income for 2023 was principally driven by the Company’s decreased net interest income due to net interest margin contraction as a result of higher deposit rates experienced during 2023 and increases in the provision for loan losses and operating expenses, offset by an increase in other income. Clients continue to migrate out of noninterest bearing checking products and into higher costing alternatives, which has lead to intense competition for deposit balances from other banks and alternative investment opportunities due to the significant rise in interest rates. Both market volatility and the higher interest rate environment resulted in lower SBA sale premiums and origination volumes. The year ended December 31, 2023 reflects a decline of $4.3 million in gain on sale of SBA loans to $2.4 million when compared to $6.8 million for 2022. Operating expenses increased by $14.5 million due to increased corporate and health insurance costs, hiring in line with the Company's strategic plan, normal merit increases and expenses associated with the expansion of the Company into New York City. The year ended December 31, 2023 included one-time charges of $2.0 million related to the retirement of certain employees and $565,000 of expense associated with the closure of three retail branches.

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 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, 2023, 2022 and 2021 (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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The effect of volume and rate changes on net interest income (on an FTE basis) for the periods indicated are shown below:

2023 compared to 2022

Net interest income, on a fully tax-equivalent basis, declined $19.8 million, or 11 percent, in 2023 to $157.7 million compared to $177.5 million in 2022. The net interest margin was 2.48 percent and 2.91 percent for the years ended December 31, 2023 and 2022, respectively, a decrease of 43 basis points year over year. The decline in net interest income and NIM for the year ended December 31, 2023, when compared to 2022 was due to a rapid increase in interest expense mostly driven by higher deposit rates during 2023 and the increase in the average balance of FHLB advances and other borrowings. The ongoing Federal Reserve monetary policy tightening intended to slow inflation has led to a significant increase in interest rates, particularly rates impacting short-term investments and deposits. This has resulted in an inversion of the U.S. Treasury yield curve driving an increase in deposit and borrowing costs at a faster rate than the yields on interest earning assets.

During the first quarter of 2022, the Company executed a balance sheet reposition 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 NIM improving by four basis points, with no impact to tangible capital or tangible book value per share.

Average interest-earning assets increased by $252.1 million to $6.36 billion at December 31, 2023 compared to $6.11 billion at 2022. The increase was predominately driven by growth in the average balance of loans of $282.0 million to $5.41 billion when comparing 2023 and 2022, which was slightly offset by a decline in the average balance of interest-earning deposits of $24.5 million and investments of $5.4 million.

Interest-earning deposits are an additional part of the Company's liquidity and interest rate risk management strategies. The combined average balance of these investments during the year ended December 31, 2023 was $147.0 million with an average yield of 4.13 percent as compared to $171.5 million and an average yield of 1.61 percent for 2022. The increase in the average yield for 2023 was due to the increase in the Federal Funds rate.

The growth in average balance of loans was driven by growth in commercial loans and residential mortgages. The average balance of commercial loans grew by $207.9 million to $2.25 billion in 2023 compared to $2.05 billion in 2022. Additionally, the average balances of residential mortgages grew $49.3 million to $562.5 million for the year ended December 31, 2023 from $513.2 million for the same 2022 period.

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The average balance of investments was $802.1 million in 2023 compared to $807.5 million for 2022 which reflected a decrease of $5.4 million or 1 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 the purchase of like duration, higher-yielding multifamily loans. Normal amortization of the portfolio coupled with the sale resulted in a slight decline in the portfolio.

For the 2023 and 2022 periods, the average yields earned on interest-earning assets were 4.81 percent and 3.49 percent, respectively, an increase of 132 basis points. The increase in the yields on interest-earning assets was primarily due to the increase in target Federal Funds rate of 525 basis points. This resulted in an increased yield on loans of 134 basis points to 5.17 percent for 2023 when compared to 3.83 percent for 2022. The yield on interest-earning deposits increased 252 basis points to 4.13 percent for 2023 when compared to 1.61 percent for the prior year.

The increase for the year ended December 31, 2023 when compared to the prior period was driven by an increase in the yield on commercial loans of 198 basis points to 6.39 percent for 2023, due to an increase in target Federal Funds rate of 525 basis points which had a greater impact on these loans, which are typically floating rates with short repricing periods. The yield on commercial mortgages for 2023 was 4.36 percent, which reflected an increase of 83 basis points when compared to 2022, which was primarily driven by the origination of loans with higher yields in the current higher interest rate environment. In addition, at December 31, 2023, 20 percent of our loans will reprice within one month, 34 percent within three months and 47 percent within one year.

During 2023 and 2022, the Company recorded yield on investments of 2.47 percent and 1.73 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 $4.72 billion for 2023 representing an increase of $267.0 million, or 6 percent, from $4.45 billion in 2022. The increase in interest-bearing liabilities was primarily due to an increase in the average balance of borrowings of $311.1 million to $337.8 million in 2023 from $26.6 million in 2022. This increase was partially offset by a decrease in interest-bearing deposits of $43.2 million to $4.25 billion in 2023 from $4.29 billion in 2022.

The decrease in the average balance of interest-bearing deposits was primarily due to a decline of money market deposits of $390.3 million to $862.7 million from $1.25 billion and savings deposits decreasing $37.9 million in 2023. Money market and savings accounts declined in 2023 due to clients shifting balances into higher-yielding short-term Treasuries and interest-bearing checking accounts. These decreases were offset by an increase into checking accounts for 2023 of $414.0 million due to the clients demand for FDIC insured products. The Company added a short-term brokered certificate of deposit ("CD") of $100.0 million in 2023 to provide additional liquidity and replace brokered deposit run off. The average balance of retail CDs increased in 2023 by $3.0 million due to consumer demand for higher-yielding deposit products.

The Company is a participant in the Reich & Tang demand Deposit Marketplace ("DDM") program and the Promontory Program. The Company uses these deposit sweep services to place customer funds into interest-bearing demand (checking) accounts at 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 participant, the Company receives an equal amount of reciprocal deposits from other participating banks. Such average reciprocal deposit balances were $862.5 million and $662.0 million for 2023 and 2022, respectively.

At December 31, 2023, uninsured/unprotected deposits were approximately $1.18 billion, or 22 percent of total deposits. This amount was adjusted to exclude $287 million of public fund deposit balances, which are fully-collateralized and protected with securities and an FHLBNY letter of credit.

The increase in borrowings of $311.1 million to $337.8 million for 2023 was principally due to the need for additional funding due to the decline in demand deposits.

For the years ended December 31, 2023 and 2022, the cost of interest-bearing liabilities was 3.13 percent and 0.80 percent, respectively, reflecting an increase of 233 basis points. The increase was driven by an increase in the average cost of interest-bearing deposits of 220 basis points to 2.89 percent for 2023. The increase in deposit and borrowing rates was due to the Federal Reserve raising the target Federal Funds rate by 525 basis points since March 2022 and a change in the composition of the deposit portfolio. The cost of borrowings increased by 314 basis points to 5.39 percent in 2023. The average cost of interest-bearing liabilities was also affected by an increase in the cost of subordinated debt of 90 basis points to 5.00 percent for 2023.

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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, 2023, the Company had investment securities held to maturity with a carrying cost of $107.8 million and an estimated fair value of $94.4 million compared with a carrying cost of $102.3 million and an estimated fair value of $87.2 million at December 31, 2022.

At December 31, 2023, the Company had investment securities available for sale with an estimated fair value of $550.6 million compared with $554.6 million at December 31, 2022. A net unrealized loss (net of income tax) of $69.2 million and a net unrealized loss (net of income tax) of $81.0 million were included in shareholders’ equity at December 31, 2023 and 2022, respectively.

The Company had one equity security (a CRA investment security) with a fair value of $13.2 million and $13.0 million at December 31, 2023 and 2022, respectively, with changes in fair value recognized in the Consolidated Statements of Income. The Company recorded an unrealized gain of $181,000 for the year ended December 31, 2023, as compared to a $1.7 million unrealized loss for the year ended December 31, 2022.

The amortized cost and fair value of investment securities held to maturity and available for sale at December 31, 2023, 2022 and 2021 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, 2023. 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

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, 2023, 42 percent of the total loan portfolio consisted of C&I loans (including equipment financing), 34 percent of multifamily loans and 12 percent of commercial mortgages.

Total loans were $5.43 billion and $5.29 billion at December 31, 2023 and 2022, respectively, an increase of $144.1 million, over the previous year. Residential loans increased $52.6 million to $578.3 million at December 31, 2023 from $525.8 million at December 31, 2022. Multifamily mortgage loans were $1.84 billion at December 31, 2023, a decrease of $27.5 million, or 1 percent, when compared to $1.86 billion at December 31, 2022. During 2023, commercial mortgages increased $13.0 million to $637.6 million when compared to $624.6 million for 2022. Commercial loans, which includes equipment financing, totaled $2.26 billion at December 31, 2023. This was an increase of $66.4 million, or 3 percent, when compared to December 31, 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 2023, the Bank sold $32.4 million of the guaranteed portion of SBA loans into the secondary market. As of December 31, 2023, the balance of the non-guaranteed portion of SBA loans held on our balance sheet totaled $47.9 million and was included in commercial loans.

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The following table presents the contractual repayments of the loan portfolio, by loan type, at December 31, 2023:

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, 2023 is as follows:

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

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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, 2023 are:

Principal types of non-owner occupied commercial real estate properties (by Call Report code), at December 31, 2023 are as follows. These loans are included in commercial mortgage loans and commercial loans on the Company’s balance sheet.

At December 31, 2023 and 2022, 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, 2023 and 2022:

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 both December 31, 2023 and 2022, goodwill was $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. Future acquisitions could result in additional goodwill.

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DEPOSITS: The following table sets forth the details of total deposits as of December 31:

(1) Interest-bearing checking included $990.7 million at December 31, 2023 and $620.1 million at December 31, 2022 of reciprocal balances in the Reich & Tang or Promontory Demand Deposit Marketplace programs.

At December 31, 2023 and 2022, the Company reported total deposits of $5.27 billion and $5.21 billion, an increase of $69.0 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 saw limited deposit increases in 2023 as the ongoing acquisition of new relationships driven by our private banking strategy was offset by 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 deposit balances at December 31, 2023 increased $69.0 million, or 1 percent, from 2022 levels to $5.27 billion. The increase was primarily due to increases of $738.6 million in interest-bearing demand deposits, $125.2 million in retail certificates of deposit and $94.5 million in brokered certificates of deposit. Increases in these accounts were a result of clients shifting balances from lower-yielding money market and noninterest-bearing demand deposits to higher-yielding deposit accounts which include reciprocal accounts that offer insurance protection. The growth in new client relationships was driven by several factors including an increase in retail deposits from our branch network; a focus on providing high-touch client service; 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 checking accounts.

The Company continues to leverage interest rate swaps to extend the duration to the matched deposits. At December 31, 2023, the Company had transacted pay fixed, receive floating interest rate swaps totaling $310.0 million in notional amount.

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:

At December 31, 2023, the Company carried deposits that exceed the FDIC insurance limit of $250,000. At December 31, 2023, 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, 2023 (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, 2023, the Company had $403.8 million of overnight borrowings at the FHLB at a rate of 5.62 percent compared to $379.5 million of overnight borrowings at the FHLB at a rate of 4.61 percent at December 31, 2022 and no overnight borrowings at December 31, 2021.

At December 31, 2023, unused short-term or overnight borrowing commitments totaled $1.4 billion from the FHLB, $22.0 million from correspondent banks and $1.7 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 have a stated maturity of December 15, 2027, and an interest rate that resets quarterly to a level equal to the then current three-month LIBOR rate plus 254 basis points, payable quarterly in arrears (which was 8.21 percent at December 31, 2023). 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.

ALLOWANCE FOR CREDIT LOSSES AND RELATED PROVISION: The allowance for credit losses ("ACL") was $65.9 million at December 31, 2023 compared to $60.8 million at December 31, 2022. The increase in the allowance for credit losses was due to the provision for credit losses of $14.1 million. The provision was partially offset by net charge-offs of $2.2 million on a previously established reserve related to one multifamily loan and $5.6 million on one equipment finance relationship. Additionally, there was a specific reserve of $4.2 million for one freight related credit with an outstanding

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balance of $23.5 million recorded during the year ended December 31, 2023. At December 31, 2023, the allowance for credit losses as a percentage of total loans outstanding was 1.21 percent compared to 1.15 percent at December 31, 2022. The Company believes that the allowance for credit losses as of December 31, 2023, represents a reasonable estimate for probable incurred losses in the portfolio at that date.

The provision for credit losses was $14.1 million for 2023, $6.4 million for 2022 and $6.5 million for 2021. The increase in the provision for credit losses for 2023 was primarily due to elevated levels of net charge-offs of $9.1 million, as compared to $1.2 million for 2022.

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. 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 million to 50 percent for loan amounts to $5 million. For investment properties, LTVs range from a maximum of 65 percent for loan amounts to $1 million to 50 percent for loan amounts to $3 million. Loans greater than $5 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 700 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 mitigate any risk. Generally, the Bank retains in its portfolio residential mortgage loans with fixed rate maturities of no greater than ten 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 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 independent appraisal of the subject property on all applications. LTVs and combined LTVs are capped at 70 percent for JLLs and 75 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 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, 2023, the average property size in the portfolio was 47 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 expenses, 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 62 percent at December 31, 2023 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 Commercial 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.

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.

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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 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 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

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income statement including an increase in the provision for credit losses, 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.

The adoption of CECL on January 1, 2022 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 an individual loan basis. Accordingly, the CECL model quantitatively accounts for some of the qualitative factors utilized in the incurred loss methodology.

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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 credit of $65,000 and a provision of $450,000 at December 31, 2023 and 2022, respectively, related to off-balance sheet commitments.

(B)
The December 31, 2023, 2022 and 2021 ACL coverage ratios include PPP loans of $1.0 million, $1.7 million and $13.8 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:

The portion of the allowance for credit losses allocated to loans collectively evaluated for impairment, commonly referred to as general reserves, were $61.3 million at December 31, 2023 and $59.3 million at December 31, 2022. General reserves at

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December 31, 2023 represented 1.13 percent of loans collectively evaluated for impairment compared to 1.12 percent at December 31, 2022. The specific reserves on individually evaluated loans were $4.5 million at December 31, 2023 compared to $1.5 million at December 31, 2022. Specific reserves were largely attributable to a $4.2 million reserve associated with one freight-related credit totaling $23.5 million at December 31, 2023.

The allowance for credit losses as a percentage of nonperforming loans decreased to 107.44 percent due to an increase in nonperforming loans. Nonperforming loans increased from $19.0 million to $61.3 million impacted by one freight related client totaling $23.5 million that was transferred to nonaccrual status during the year and three multifamily credits totaling $16.6 million at December 31, 2023. 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 $9.0 million on loans identified as collateral-dependent individually evaluated loans during 2023, which included $3.2 million in charge-offs of the specific reserve on the previously mentioned freight-related credit and multifamily property. The Company charged off $1.5 million on loans identified as collateral-dependent impaired loans during 2022.

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

(1)
Includes $16.5 million and $4.5 million outstanding to U.S. governmental entities at December 31, 2023 and December 31, 2022, respectively. 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)
On January 1, 2023, the Company adopted Accounting Standards Update 2022-02, which replaced the accounting and recognition of TDRs.

(3)
The increase in nonaccrual loans in 2023 was due to one freight credit totaling $23.5 million and three multifamily credits totaling $16.6 million at December 31, 2023.

At December 31, 2023, there were no commitments to lend additional funds to borrowers whose loans were classified as nonperforming.

LOAN MODIFICATIONS AND TROUBLED DEBT RESTRUCTURINGS:

On January 1, 2023, the Company adopted ASU 2022-02, which replaced the accounting and recognition of TDRs. The Company will provide modifications, which may include other than insignificant delays in payment of amounts due, extension

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of the terms of the notes or reduction in the interest rates on the notes. In certain instances, the Company may grant more than one type of modification.

The following table presents the modified loans, by collateral type, at December 31, 2023:

The following table presents the troubled debt restructured loans, by collateral type, at December 31, 2022:

At December 31, 2023, there was one modified loan of $3.0 million included in nonaccrual loans. At December 31, 2022, there were $13.4 million of troubled debt restructured loans included in nonaccrual loans. At December 31, 2023, one modified loan of $3.0 million was included in the individually evaluated loans and had a specific reserve of $185,000. At December 31, 2022, $13.2 million troubled debt restructured loans were included in the individually evaluated loans and had specific reserves of $1.2 million.

Except as disclosed, the Company did not have any potential problem loans at December 31, 2023 or December 31, 2022 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 totaled $60.7 million and $16.7 million at December 31, 2023 and 2022, respectively. The increase was primarily due to the freight-related credit mentioned above. Individually evaluated loans include nonaccrual loans of $60.6 million and $15.8 million at December 31, 2023 and 2022, respectively. Individually evaluated loans included one modified loan at December 31, 2023, totaling $3.0 million. Individually evaluated loans included troubled debt restructured loans of $150,000 at December 31, 2022.

The following table presents individually evaluated loans, by collateral type, at December 31, 2023 and 2022: