PEAPACK-GLADSTONE FINANCIAL CORPORATION FORWARD LOOKING STATEMENTS: This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about Management's confidence and strategies and Management's expectations about operations, growth, financial results, new and existing programs and products, investments, relationships, opportunities and market conditions. These statements may be identified by such forward-looking terminology as "expect", "look", "believe", "anticipate", "may", or similar statements or variations of such terms. Actual results may differ materially from such forward-looking statements. Factors that may cause results to differ materially from those contemplated by such forward-looking statements include, among others, those risk factors identified in the Company's Form 10-K for the year endedDecember 31, 2021 , in addition to/which include the following: • inflation and changes in interest rates and potential effects from a recession, 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; • 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 disruption to local, regional, national and global economic activity caused by infectious disease outbreaks, including the COVID-19 pandemic and variants thereof, and the significant and continuing impact that such pandemics may have on our growth, operations, earnings and asset quality; • the impact of potentially higher operating expenses; • 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 ourNew Jersey andNew York market areas; • declines in our net interest margin and/or our ability to originate loans caused by the interest rate environment and/or our highly competitive market; • declines in the value in our investment portfolio; • impact from a pandemic event on our business, operations, customers, allowance for credit losses and capital levels; • higher than expected increases in our allowance for credit losses; • higher than expected increases in credit losses or in the level of delinquent, nonperforming, classified and criticized loans; • decline in real estate values within our market areas; • legislative and regulatory actions (including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Basel III and related regulations) that may result in increased compliance costs; • successful cyberattacks against our IT infrastructure and that of our IT and third-party providers; • higher than expectedFDIC insurance premiums; • adverse weather conditions; • the current or anticipated impact of military conflict, terrorism or other geopolitical events; • our inability to successfully generate new business in new geographic markets; • a reduction in our lower-cost funding sources; • our inability to adapt to technological changes; • claims and litigation pertaining to fiduciary responsibility, environmental laws and other matters; • our inability to retain key employees; • demands for loans and deposits in our market areas; • adverse changes in securities markets; • changes in accounting policies and practices; and • other unexpected material adverse changes in our operations or earnings. Moreover, our operations depend on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the pandemic could hinder our ability to operate our business or execute our business strategy. Except as may be required by applicable law or regulation, the Company undertakes no duty to update any forward-looking statements to conform the statement to actual results or change in the Company's expectations. Although we believe that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. 49 -------------------------------------------------------------------------------- CRITICAL ACCOUNTING POLICIES AND ESTIMATES: Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon the Company's consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Company's Audited Consolidated Financial Statements for the year endedDecember 31, 2021 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. OnJanuary 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 conditions, as well as the incorporation of reasonable and supportable forecasts. Management evaluates a variety of factors including available published economic information in arriving at its forecast. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. Also included in the allowance for credit losses are qualitative reserves that are expected, but, in the Management's assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. Factors may include changes in lending policies and procedures, size and composition of the portfolio, experience and depth of Management and the effect of external factors such as competition, legal and regulatory requirements, among others. The allowance is available for any loan that, in Management's judgment, should be charged off. Although Management uses the best information available, the level of the allowance for credit losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for credit losses. Such agencies may require the Company to make additional provisions for credit losses based upon information available to them at the time of their examination. Furthermore, the majority of the Company's loans are secured by real estate inNew 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 accounts for its debt securities in accordance with ASC 320, "Investments -Debt Securities " and its equity security in accordance with ASC 321, "Investments -Equity Securities ". All securities are classified as available for sale and are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income/(loss), net of tax, with the exception of the Company's investment in a CRA investment fund which is classified as an equity security. In accordance with ASU 2016-01, "Financial Instruments" unrealized holding gains and losses are marked to market through the income statement.
EXECUTIVE SUMMARY: The following table presents certain key aspects of our
performance for the three months ended
50
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For the Three Months Ended
September 30, Change
(Dollars in thousands, except per share data) 2022 2021 2022 vs 2021
Results of Operations:
Net interest income $ 45,525 $ 35,211 $ 10,314
Provision for credit losses (1) 599 1,600 (1,001 )
Net interest income after provision for
credit losses 44,926 33,611 11,315
Wealth management fee income 12,943 13,860 (917 )
Other income (2) 3,440 3,921 (481 )
Operating expense (3) 33,560 32,185 1,375
Income before income tax expense 27,749 19,207 8,542
Income tax expense 7,623 5,036 2,587
Net income $ 20,126 $ 14,171 $ 5,955
Total revenue (4) $ 61,908 $ 52,992 $ 8,916
Diluted average shares outstanding 18,420,661 19,273,831 (853,170 )
Diluted earnings per share $ 1.09 $ 0.74 $ 0.35
Return on average assets annualized ("ROAA") 1.30 % 0.95 % 0.35 %
Return on average equity annualized ("ROAE") 15.21 10.40 4.81
(1)
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.
(2)
The quarter ended September 30, 2022 and 2021 included a fair value adjustment
on a CRA equity security of $571,000 and $70,000 , respectively.
(3)
The quarter ended September 2021 included $1.4 million of expense related to a
swap valuation allowance.
(4)
Total revenue equals net interest income plus wealth management fee income and
other income.
The following table presents certain key aspects of our performance for the nine
months ended
For the Nine Months Ended
September 30 , Change
(Dollars in thousands, except per share data) 2022 2021 2022 vs 2021 Results of Operations: Net interest income$ 128,040 $ 100,849 $ 27,191 Provision for loan and lease losses (1) 4,423 2,725 1,698 Net interest income after provision for loan and lease losses 123,617 98,124 25,493 Wealth management fee income (2) 41,668 39,025 2,643 Other income (3) 7,937 14,254 (6,317 ) Operating expense (2) (4) 100,388 94,463 5,925 Income before income tax expense 72,834 56,940 15,894 Income tax expense 19,167 15,173 3,994 Net income$ 53,667 $ 41,767 $ 11,900 Total revenue (5)$ 177,645 $ 154,128 $ 23,517 Diluted average shares outstanding 18,652,042 19,390,522 (738,480 ) Diluted earnings per share$ 2.88 $
2.15 $ 0.73
Return on average assets annualized (ROAA) 1.16 % 0.94 % 0.22 % Return on average equity annualized (ROAE) 13.46 10.43 3.03 (1) Commencing onJanuary 1, 2022 , the allowance calculation is based on the CECL methodology. Prior toJanuary 1, 2022 , the calculation was based on the incurred loss methodology. 51 --------------------------------------------------------------------------------
(2)
The nine months endedSeptember 30, 2022 included nine months of wealth management fee income and expense related to theJuly 2021 acquisition ofPrinceton Portfolio Strategies Group ("PPSG") while the nine months endedSeptember 30, 2021 included three months. (3) The nine months endedSeptember 30, 2022 included a$6.6 million loss on sale of securities associated with a balance sheet reposition executed in the first quarter of 2022, and a$1.7 million fair value adjustment on a CRA equity security. The nine months endedSeptember 30, 2021 included a cost of$842,000 related to the termination of certain interest rate swaps; a$1.4 million gain on sale of loans held at lower of cost or fair value;$722,000 of income related to referral of PPP loans to a third party;$455,000 of additional bank-owned life insurance ("BOLI") income related to the receipt of life insurance proceeds; and a$293,000 fair value adjustment on a CRA equity security. (4) Each of the nine months endedSeptember 30, 2022 and 2021 included$1.5 million of severance expense related to certain staff reorganizations with several areas of the bank. The nine months endedSeptember 30, 2021 included$648,000 of expense related to the redemption of subordinated debt and$1.4 million related to a swap valuation allowance. (5) Total revenue equals net interest income plus wealth management fee income and other income.
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