PEAPACK GLADSTONE FINANCIAL CORP 10-Q

pgc-10q_20210930.htm UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 001-16197 PEAPACK-GLADSTONE FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) New Jersey 22-3537895 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 Hills Drive , Suite 300 Bedminster , New Jersey 07921-0700 (Address of principal executive offices, including zip code) ( 908 ) 234-0700 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock, no par value PGC The NASDAQ Stock Market, LLC Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act: Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ Number of shares of Common Stock outstanding as of October 29, 2021: 18,634,618 PEAPACK-GLADSTONE FINANCIAL CORPORATION PART I FINANCIAL INFORMATION Item 1 Financial Statements 3 Consolidated Statements of Condition at September 30, 2021 and December 31, 2020 3 Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020 4 Consolidated Statements of Comprehensive Income/(Loss) for the three and nine months ended September 30, 2021 and 2020 5 Consolidated Statement of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2021 and 2020 6 Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 8 Notes to Consolidated Financial Statements 9 Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 44 Item 3 Quantitative and Qualitative Disclosures About Market Risk 65 Item 4 Controls and Procedures 67 PART II OTHER INFORMATION Item 1 Legal Proceedings 68 Item 1A Risk Factors 68 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 68 Item 3 Defaults Upon Senior Securities 68 Item 4 Mine Safety Disclosures 68 Item 5 Other Information 68 Item 6 Exhibits 69 2 Item 1. Financial Statements PEAPACK-GLADSTONE FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CONDITION (Dollars in thousands, except per share data) (unaudited) (audited) September 30, December 31, 2021 2020 ASSETS Cash and due from banks $ 9,299 $ 10,629 Federal funds sold — 102 Interest-earning deposits 606,913 642,591 Total cash and cash equivalents 616,212 653,322 Securities available for sale 843,779 622,689 Equity security, at fair value 14,824 15,117 FHLB and FRB stock, at cost 12,950 13,709 Loans held for sale, at fair value 3,013 13,588 Loans held for sale, at lower of cost or fair value 17,235 18,520 Loans 4,575,398 4,372,437 Less: Allowance for loan and lease losses 65,133 67,309 Net loans 4,510,265 4,305,128 Premises and equipment 23,123 21,609 Other real estate owned — 50 Accrued interest receivable 22,790 22,495 Bank owned life insurance 46,510 46,809 Goodwill 36,212 33,103 Other intangible assets 13,121 10,788 Finance lease right-of-use assets 3,769 4,330 Operating lease right-of-use assets 10,307 9,421 Other assets 66,175 99,764 TOTAL ASSETS $ 6,240,285 $ 5,890,442 LIABILITIES Deposits: Noninterest-bearing demand deposits $ 986,765 $ 833,500 Interest-bearing deposits: Checking 2,355,892 1,849,254 Savings 168,831 130,731 Money market accounts 1,287,686 1,298,885 Certificates of deposit - retail 426,981 530,222 Certificates of deposit - listing service 31,382 32,128 Subtotal deposits 5,257,537 4,674,720 Interest-bearing demand - brokered 85,000 110,000 Certificates of deposit - brokered 33,804 33,764 Total deposits 5,376,341 4,818,484 Short-term borrowings — 15,000 Paycheck Protection Program Liquidity Facility 48,496 177,086 Finance lease liabilities 6,063 6,753 Operating lease liabilities 10,644 9,737 Subordinated debt, net 132,629 181,794 Deferred tax liabilities, net 27,575 32,978 Accrued expenses and other liabilities 95,523 121,488 TOTAL LIABILITIES 5,697,271 5,363,320 SHAREHOLDERS’ EQUITY Preferred stock (no par value; authorized 500,000 shares; liquidation preference of $ 1,000 per share) — — Common stock (no par value; stated value $ 0.83 per share; authorized 42,000,000 shares; issued shares, 20,615,903 at September 30, 2021 and 20,342,881 at December 31, 2020; outstanding shares, 18,627,910 at September 30, 2021 and 18,974,703 at December 31, 2020 17,185 16,958 Surplus 330,392 326,592 Treasury stock at cost, 1,987,993 shares at September 30, 2021 and 1,368,178 shares at December 31, 2020 ( 55,893 ) ( 36,477 ) Retained earnings 260,365 221,441 Accumulated other comprehensive loss, net of income tax ( 9,035 ) ( 1,392 ) TOTAL SHAREHOLDERS’ EQUITY 543,014 527,122 TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY $ 6,240,285 $ 5,890,442 See accompanying notes to consolidated financial statements 3 PEAPACK-GLADSTONE FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data) (Unaudited) See accompanying notes to consolidated financial statements Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 INTEREST INCOME Interest and fees on loans $ 37,040 $ 37,704 $ 108,921 $ 119,330 Interest on investments: Taxable 2,824 2,182 8,473 6,749 Tax-exempt 28 51 107 166 Interest on loans held for sale 33 78 124 153 Interest on interest-earning deposits 142 159 367 820 Total interest income 40,067 40,174 117,992 127,218 INTEREST EXPENSE Interest on savings and interest-bearing deposit accounts 1,880 2,066 5,358 11,640 Interest on certificates of deposit 836 2,529 3,333 9,370 Interest on borrowed funds 57 1,221 448 3,360 Interest on finance lease liability 74 84 229 261 Interest on subordinated debt 1,358 1,222 5,650 3,667 Subtotal - interest expense 4,205 7,122 15,018 28,298 Interest on interest-bearing demand - brokered 385 636 1,334 2,259 Interest on certificates of deposits - brokered 266 267 791 794 Total interest expense 4,856 8,025 17,143 31,351 NET INTEREST INCOME BEFORE PROVISION FOR LOAN AND LEASE LOSSES 35,211 32,149 100,849 95,867 Provision for loan and lease losses 1,600 5,150 2,725 30,050 NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 33,611 26,999 98,124 65,817 OTHER INCOME Wealth management fee income 13,860 10,119 39,025 30,070 Service charges and fees 959 785 2,701 2,296 Bank owned life insurance 311 314 1,388 960 Gain on loans held for sale at fair value (mortgage banking) 408 954 1,842 1,796 Gain on loans held for sale at lower of cost or fair value — 7,429 1,407 7,426 Fee income related to loan level, back-to-back swaps — — — 1,620 Gain on sale of SBA loans 1,569 79 3,950 1,391 Corporate advisory fee income 84 75 1,303 215 Loss on swap termination — — ( 842 ) — Other income 660 456 2,798 1,257 Securities gains/(losses), net ( 70 ) — ( 293 ) 323 Total other income 17,781 20,211 53,279 47,354 OPERATING EXPENSES Compensation and employee benefits 19,859 19,202 61,759 57,614 Premises and equipment 4,459 4,109 12,646 12,188 FDIC insurance expense 555 605 1,669 1,310 Swap valuation allowance 1,350 — 1,350 — Other operating expense 5,962 4,545 17,039 14,598 Total operating expenses 32,185 28,461 94,463 85,710 INCOME BEFORE INCOME TAX EXPENSE 19,207 18,749 56,940 27,461 Income tax expense 5,036 5,202 15,173 4,299 NET INCOME $ 14,171 $ 13,547 $ 41,767 $ 23,162 EARNINGS PER SHARE Basic $ 0.76 $ 0.72 $ 2.21 $ 1.23 Diluted $ 0.74 $ 0.71 $ 2.15 $ 1.22 WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING Basic 18,763,316 18,908,337 18,891,601 18,879,688 Diluted 19,273,831 19,132,650 19,390,522 19,052,605 4 PEAPACK-GLADSTONE FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (Dollars in thousands) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Net income $ 14,171 $ 13,547 $ 41,767 $ 23,162 Comprehensive income/(loss): Unrealized (losses)/gains on available for sale securities: Unrealized holding (losses)/gains arising during the period ( 5,635 ) ( 1,029 ) ( 14,148 ) 6,801 ( 5,635 ) ( 1,029 ) ( 14,148 ) 6,801 Tax effect 1,342 252 3,378 ( 1,649 ) Net of tax ( 4,293 ) ( 777 ) ( 10,770 ) 5,152 Unrealized gains/(losses) on cash flow hedges: Unrealized holding gains/(losses) arising during the period 936 1,439 3,507 ( 7,249 ) Reclassification adjustment for amounts included in net income — ( 5 ) 842 ( 85 ) 936 1,434 4,349 ( 7,334 ) Tax effect ( 263 ) ( 408 ) ( 1,222 ) 1,930 Net of tax 673 1,026 3,127 ( 5,404 ) Total other comprehensive income/(loss) ( 3,620 ) 249 ( 7,643 ) ( 252 ) Total comprehensive income $ 10,551 $ 13,796 $ 34,124 $ 22,910 See accompanying notes to consolidated financial statements 5 PEAPACK-GLADSTONE FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended September 30, 2021 and September 30, 2020 Accumulated Other Total (In thousands, except share and Preferred Common Treasury Retained Comprehensive Shareholders' per share data) Stock Stock Surplus Stock Earnings Loss Equity Balance at July 1, 2021 18,829,877 common shares outstanding $ — $ 17,164 $ 328,035 $ ( 48,461 ) $ 247,136 $ ( 5,415 ) $ 538,459 Net income — — — — 14,171 — 14,171 Comprehensive loss — — — — — ( 3,620 ) ( 3,620 ) Amortization of restricted stock units — — 1,807 — — — 1,807 Cash dividends declared on common stock ($ 0.05 per share) — — — — ( 942 ) — ( 942 ) Share repurchase, 227,060 shares — — — ( 7,432 ) — — ( 7,432 ) Common stock options exercised, 400 shares — 1 5 — — — 6 Exercise of warrants, 10,000 net of 6,416 shares used to exercise, 3,584 shares — 2 ( 2 ) — — — — Issuance of shares for Employee Stock Purchase Plan, 6,889 shares — 6 226 — — — 232 Issuance of common stock for acquisition, 14,220 shares — 12 321 — — — 333 Balance at September 30, 2021 18,627,910 common shares outstanding $ — $ 17,185 $ 330,392 $ ( 55,893 ) $ 260,365 $ ( 9,035 ) $ 543,014 Accumulated Other Total (In thousands, except share and Preferred Common Treasury Retained Comprehensive Shareholders' per share data) Stock Stock Surplus Stock Earnings Loss Equity Balance at July 1, 2020 18,905,135 common shares outstanding $ — $ 16,900 $ 322,796 $ ( 36,477 ) $ 206,757 $ ( 1,996 ) $ 507,980 Net income — — — — 13,547 — 13,547 Comprehensive income — — — — — 249 249 Amortization of restricted stock awards/units — — 1,798 — — — 1,798 Cash dividends declared on common stock ($ 0.05 per share) — — — — ( 945 ) — ( 945 ) Issuance of shares for Employee Stock Purchase Plan, 5,598 shares — 4 95 — — — 99 Issuance of common stock for acquisition 14,220 shares — 12 ( 12 ) — — — — Balance at September 30, 2020 18,924,953 common shares outstanding $ — $ 16,916 $ 324,677 $ ( 36,477 ) $ 219,359 $ ( 1,747 ) $ 522,728 Nine Months Ended September 30, 2021 and September 30, 2020 6 Accumulated Other (In thousands, except share and Preferred Common Treasury Retained Comprehensive per share data) Stock Stock Surplus Stock Earnings Loss Total Balance at January 1, 2021 18,974,703 common shares outstanding $ — $ 16,958 $ 326,592 $ ( 36,477 ) $ 221,441 $ ( 1,392 ) $ 527,122 Net income — — — — 41,767 — 41,767 Comprehensive loss — — — — — ( 7,643 ) ( 7,643 ) Restricted stock units issued, 288,348 shares — 240 ( 240 ) — — — — Restricted stock units repurchased on vesting to pay taxes, ( 71,749 ) shares — ( 60 ) ( 2,171 ) — — — ( 2,231 ) Amortization of restricted stock units — — 5,229 — — — 5,229 Cash dividends declared on common stock ($ 0.15 per share) — — — — ( 2,843 ) — ( 2,843 ) Share repurchase, 619,815 shares — — — ( 19,416 ) — — ( 19,416 ) Common stock options exercised, 3,220 net of 62 shares used to exercise, 3,158 shares — 3 37 — — — 40 Exercise of warrants, 50,000 net of 32,616 shares used to exercise, 17,384 shares — 14 ( 14 ) — — — — Issuance of shares for Employee Stock Purchase Plan, 21,661 shares — 18 638 — — — 656 Issuance of common stock for acquisition, 14,220 shares — 12 321 — — — 333 Balance at September 30, 2021 18,627,910 common shares outstanding $ — $ 17,185 $ 330,392 $ ( 55,893 ) $ 260,365 $ ( 9,035 ) $ 543,014 Accumulated Other (In thousands, except share and Preferred Common Treasury Retained Comprehensive per share data) Stock Stock Surplus Stock Earnings Loss Total Balance at January 1, 2020 18,926,810 common shares outstanding $ — $ 16,733 $ 319,375 $ ( 29,990 ) $ 199,029 $ ( 1,495 ) $ 503,652 Net income — — — — 23,162 — 23,162 Comprehensive loss — — — — — ( 252 ) ( 252 ) Restricted stock units issued, 157,690 shares — 131 ( 131 ) — — — — Restricted stock units/awards repurchased on vesting to pay taxes, ( 39,686 ) shares — ( 33 ) ( 610 ) — — — ( 643 ) Amortization of restricted stock awards/units — — 5,062 — — — 5,062 Cash dividends declared on common stock ($ 0.15 per share) — — — — ( 2,832 ) — ( 2,832 ) Share repurchase, ( 220,222 ) shares — — — ( 6,487 ) — — ( 6,487 ) Common stock options exercised, 8,400 net of 2,149 shares used to exercise, 6,251 shares — 7 69 — — — 76 Exercise of warrants 20,000 net of 13,469 shares used to exercise, 6,531 shares — 6 ( 6 ) — — — — Issuance of shares for Employee Stock Purchase Plan, 52,533 shares — 43 947 — — — 990 Issuance of common stock for acquisition, 35,046 shares — 29 ( 29 ) — — — — Balance at September 30, 2020 18,924,953 common shares outstanding $ — $ 16,916 $ 324,677 $ ( 36,477 ) $ 219,359 $ ( 1,747 ) $ 522,728 See accompanying notes to consolidated financial statements 7 PEAPACK-GLADSTONE FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) Nine Months Ended September 30, 2021 2020 OPERATING ACTIVITIES: Net income $ 41,767 $ 23,162 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,367 2,312 Amortization of premium and accretion of discount on securities, net 4,502 3,216 Amortization of restricted stock 5,229 5,062 Amortization of intangible assets 1,167 966 Amortization of subordinated debt costs 931 168 Provision for loan and lease losses 2,725 30,050 Deferred tax benefit ( 3,247 ) ( 2,336 ) Stock-based compensation and employee stock purchase plan expense 93 199 Fair value adjustment for equity security 293 ( 323 ) Loans originated for sale (1) ( 131,427 ) ( 125,466 ) Proceeds from sales of loans held for sale (1) 142,141 117,892 Gain on loans held for sale (1) ( 5,792 ) ( 3,188 ) Gain on loans held for sale at lower of cost or fair value ( 1,407 ) ( 7,426 ) Gain on OREO sold ( 51 ) — Gain on life insurance death benefit ( 455 ) — Increase in cash surrender value of life insurance, net ( 465 ) ( 517 ) Increase in accrued interest receivable ( 295 ) ( 11,674 ) Decrease/(increase) in other assets 2,998 ( 2,659 ) Increase/(decrease) in accrued expenses and other liabilities 7,390 ( 10,697 ) NET CASH PROVIDED BY OPERATING ACTIVITIES 68,464 18,741 INVESTING ACTIVITIES: Principal repayments, maturities and calls of securities available for sale 338,596 152,273 Redemptions of FHLB and FRB stock 807 34,737 Purchase of securities available for sale ( 578,336 ) ( 339,797 ) Purchase of equity securities — ( 4,000 ) Purchase of FHLB and FRB stock ( 48 ) ( 29,102 ) Proceeds from sales of loans held for sale at lower of cost or fair value 54,123 372,406 Net increase in loans, net of participations sold ( 253,638 ) ( 409,005 ) Proceeds from sales of other real estate 101 — Purchase of premises and equipment ( 3,371 ) ( 2,506 ) Purchase of wealth management company ( 5,500 ) — Proceeds from life insurance death benefit 1,219 — NET CASH USED IN INVESTING ACTIVITIES ( 446,047 ) ( 224,994 ) FINANCING ACTIVITIES: Net increase in deposits 557,857 615,639 Net decrease in short-term borrowings — ( 113,100 ) Proceeds from Paycheck Protection Program Liquidity Facility — 535,838 Repayments of Paycheck Protection Program Liquidity Facility ( 128,590 ) ( 352,048 ) Repayments of FHLB advances ( 15,000 ) — Dividends paid on common stock ( 2,843 ) ( 2,832 ) Exercise of Stock Options, net of stock swaps 40 76 Restricted stock repurchased on vesting to pay taxes ( 2,231 ) ( 643 ) Repayments of subordinated debt ( 50,000 ) — Issuance of shares for employee stock purchase plan 656 990 Shares repurchased ( 19,416 ) ( 6,487 ) NET CASH PROVIDED BY FINANCING ACTIVITIES 340,473 677,433 Net (decrease)/increase in cash and cash equivalents ( 37,110 ) 471,180 Cash and cash equivalents at beginning of period 653,322 208,185 Cash and cash equivalents at end of period $ 616,212 $ 679,365 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 16,128 $ 30,260 Income tax, net 13,448 551 Transfer of loans to loans held for sale 45,776 364,910 Security purchases settled in subsequent period — 15,088 (1) Includes mortgage loans originated with the intent to sell which are carried at fair value. In addition, this includes the guaranteed portion of U.S. Small Business Administration (“SBA”) loans which are carried at the lower of cost or fair value. See accompanying notes to consolidated financial statements 8 PEAPACK-GLADSTONE FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Certain information and footnote disclosures normally included in the audited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2020 for Peapack-Gladstone Financial Corporation (the “Corporation” or the “Company”). In the opinion of the management of the Corporation, the accompanying unaudited Consolidated Interim Financial Statements contain all adjustments (consisting solely of normal and recurring accruals) necessary to present fairly the financial position as of September 30, 2021, and the results of operations, comprehensive income/(loss), changes in shareholders’ equity and cash flow statements for the three and nine months ended September 30, 2021 and 2020. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the full year or for any future period. Principles of Consolidation and Organization: The consolidated financial statements of the Company are prepared on the accrual basis and include the accounts of the Company and its wholly-owned subsidiary, Peapack-Gladstone Bank (the “Bank”). The consolidated financial statements also include the Bank’s wholly-owned subsidiaries: • PGB Trust & Investments of Delaware • Peapack Capital Corporation (“PCC”) • Murphy Capital Management (“Murphy Capital”) • Peapack-Gladstone Mortgage Group, Inc. owns 99 percent of Peapack Ventures, LLC and 79 percent of Peapack-Gladstone Realty, Inc., a New Jersey real estate investment company • PGB Trust & Investments of Delaware owns one percent of Peapack Ventures, LLC • Peapack Ventures, LLC owns the remaining 21 percent of Peapack-Gladstone Realty, Inc. • PGB Securities, Inc. (formed in the second quarter of 2020) While the following footnotes include the consolidated results of the Company, the Bank and their subsidiaries, these footnotes primarily reflect the Bank’s and its subsidiaries’ activities. All significant intercompany balances and transactions have been eliminated from the accompanying consolidated financial statements. Basis of Financial Statement Presentation : The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. In preparing the financial statements, Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the statement of condition and revenues and expenses for the periods presented. Actual results could differ from those estimates. Segment Information : The Company’s business is conducted through two business segments: (1) its banking segment (“Banking”), which involves the delivery of loan and deposit products to customers, and (2) the Peapack Private Wealth Management Division (“Peapack Private”), which includes asset management services to individuals and institutions. Management uses certain methodologies to allocate income and expense to the business segments. The Banking segment includes: commercial (includes commercial and industrial (“C&I”) and equipment financing), commercial real estate, multifamily, residential and consumer lending activities; treasury management services; C&I advisory services; escrow management; deposit generation; operation of ATMs; telephone and internet banking services; merchant credit card services and customer support services. Peapack Private includes: investment management services for individuals and institutions; personal trust services, including services as executor, trustee, administrator and custodian; and other financial planning and advisory services. This segment also includes the activity from the Delaware subsidiary, PGB Trust & Investments of Delaware, and Murphy Capital. Wealth management fees are primarily earned over time as the Company provides the contracted monthly or quarterly services and are generally assessed based on a tiered scale of the market value of assets under management (“AUM”) at month-end. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed (i.e. trade date). 9 Cash and Cash Equivalents: For purposes of the statements of cash flows, cash and cash equivalents include cash and due from banks, interest-earning deposits and federal funds sold. Generally, federal funds are sold for one-day periods. Cash equivalents are of original maturities of 90 days or less. Net cash flows are reported for customer loan and deposit transactions and short-term borrowings with original maturities of 90 days or less. Interest-Earning Deposits in Other Financial Institutions : Interest-earning deposits in other financial institutions mature within one year and are carried at cost. Securities : All debt securities are classified as available for sale and are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. The Company also has an investment in a Community Reinvestment Act (“CRA”) investment fund, which is classified as an equity security. Interest income includes amortization of purchase premiums and discounts. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated, and premiums on callable debt securities, which are amortized to the earliest call date. Gains and losses on sales are recorded on the trade date and determined using the specific identification method. Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant. For securities in an unrealized loss position, Management considers the extent and duration of the unrealized loss and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) other-than-temporary impairment related to credit loss, which is recognized in the income statement and (2) other-than-temporary impairment related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) Stock: The Bank is a member of the FHLB system. Members are required to own a certain amount of FHLB stock, based on the level of borrowings and other factors. FHLB stock is carried at cost, classified as a restricted security and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. The Bank is also a member of the Federal Reserve Bank of New York and required to own a certain amount of FRB stock. FRB stock is carried at cost and classified as a restricted security. Dividends are reported as income. Loans Held for Sale: Mortgage loans originated with the intent to sell in the secondary market are carried at fair value, as determined by outstanding commitments from investors. Mortgage loans held for sale are generally sold with servicing rights released; therefore, no servicing rights are recorded. Gains and losses on sales of mortgage loans, shown as gain on sale of loans on the Statement of Income, are based on the difference between the selling price and the carrying value of the related loan sold. SBA loans originated with the intent to sell in the secondary market are carried at the lower of cost or fair value. SBA loans are generally sold with the servicing rights retained. Gains and losses on the sale of SBA loans are based on the difference between the selling price and the carrying value of the related loan sold. Total SBA loans serviced totaled $ 91.4 million and $ 65.5 million as of September 30, 2021 and December 31, 2020, respectively. SBA loans held for sale totaled $ 11.6 million and $ 6.0 million at September 30, 2021 and December 31, 2020, respectively. Loans originated with the intent to hold and subsequently transferred to loans held for sale are carried at the lower of cost or fair value. These are loans that the Company no longer has the intent to hold for the foreseeable future. Loans: Loans that Management has the intent and ability to hold for the foreseeable future or until maturity are stated at the principal amount outstanding. Interest on loans is recognized based upon the principal amount outstanding. Loans are stated at face value, less purchased premium and discounts and net deferred fees. Loan origination fees and certain direct loan origination costs are deferred and recognized on a level-yield method over the life of the loan as an adjustment to the loan’s yield. The definition of recorded investment in loans includes accrued interest receivable and deferred fees/cost, however, for the Company’s loan disclosures, accrued interest and deferred fees/cost were excluded as the impact was not material. Loans are considered past due when they are not paid within 30 days in accordance with contractual terms. The accrual of income on loans, including impaired loans, is discontinued if, in the opinion of Management, principal or interest is not likely to be paid 10 in accordance with the terms of the loan agreement, or when principal or interest is past due 90 days unless the asset is both well secured and in the process of collection. All interest accrued but not received for loans placed on nonaccrual are reversed against interest income. Payments received on nonaccrual loans are recorded as principal payments. A nonaccrual loan is returned to accrual status only when interest and principal payments are brought current and future payments are reasonably assured, generally when the Bank receives contractual payments for a minimum of six consecutive months. Commercial loans are generally charged off , in whole or in part, after an analysis is completed which indicates that collectability of the full principal balance is in doubt. Consumer closed-end loans are generally charged off after they become 120 days past due and open-end loans after 180 days . Subsequent payments are credited to income only if collection of principal is not in doubt. If principal and interest payments are brought contractually current and future collectability is reasonably assured, loans may be returned to accrual status. Nonaccrual mortgage loans are generally charged off to the extent that the value of the underlying collateral does not cover the outstanding principal balance. The majority of the Company ’s loans are secured by real estate in New Jersey, New York and Pennsylvania. Allowance for Loan and Lease Losses: The allowance for loan and lease losses is a valuation allowance for credit losses that is Management’s estimate of probable losses in the loan portfolio. The process to determine reserves 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 impairment 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 required using past loan loss experience, the size and composition of the portfolio, information about specific borrower situations, estimated collateral values, level of and trends in delinquent, classified and nonperforming loans, economic conditions and other factors. Allocations of the allowance may be made for specific loans via a specific reserve, but the entire allowance is available for any loan that, in Management’s judgment, should be charged off. The allowance consists of specific and general components. The specific component of the allowance relates to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors considered by Management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Loans are individually evaluated for impairment when they are classified as substandard, nonaccrual or TDR by Management. If a loan is considered impaired, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or if repayment is expected solely from the underlying collateral, the loan principal balance is compared to the fair value of collateral less estimated disposition costs to determine the need, if any, for a charge off. The general component of the allowance covers non-impaired loans and is based primarily on the Company’s historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experience by the Company on a weighted average basis over the previous three years. This actual loss experience is adjusted by other qualitative factors based on the risks present for each portfolio segment. As a result of the effects of the COVID-19 pandemic, the Company increased certain qualitative factors in 2020 related to elevated levels of unemployment, economic forecasts and approved loan deferral payment requests as businesses both locally and nationally were shut down and have only gradually and partially reopened. The Company re-evaluated the qualitative factors related to the pandemic and reduced these factors during the first nine months of 2021. The Company also considered qualitative factors related to the following: levels of and trends in delinquencies and impaired loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures and practices; experience, ability and depth of lending management and other relevant staffing and experience; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. For loans that are graded as non-impaired, the Company allocates a higher general reserve percentage than pass-rated loans using a multiple that is calculated annually through a migration analysis. At both September 30, 2021 and December 31, 2020, the multiple was 2.25 times for non-impaired special mention loans and 3.25 times for non-impaired substandard loans. A troubled debt restructuring (“TDR”) is a modified loan with concessions made by the lender to a borrower who is experiencing financial difficulty. TDRs are impaired and are generally measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair 11 value of the collateral, less estimated disposition costs. For TDRs that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan and lease losses. On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security ("CARES”) Act, which provides entities with optional temporary relief from certain accounting and financial reporting requirements under U.S. GAAP. The CARES Act allows financial institutions to suspend application of certain current TDR accounting guidance under Accounting Standards Codification ("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. 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. The revised CARES Act allows for loan modifications through January 1, 2022. 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 experiencing financial difficulty under ASC 310-40. The Company continues to prudently work with borrowers negatively impacted by the COVID-19 pandemic while managing credit risks and recognizing an appropriate allowance for loan and lease losses on its loan portfolio. The Company approved total loan modifications under the CARES Act of $ 947.0 million, of which $ 33.1 million remain outstanding as of September 30, 2021. Another key program under the CARES Act is the Paycheck Protection Program (“PPP”) administered by the SBA which provided funding to qualifying businesses and organizations. Under this program, the Company has provided fundings of approximately $ 650 million. In the third quarter of 2020 and second quarter of 2021, the Company sold approximately $ 355.0 million and $ 56.5 million, respectively, of such loans, servicing rights released to a third party. The Company also referred approximately $ 124 million of PPP loans to a third party during the first six months of 2021. The Company has approximately $ 48.7 million of PPP loans remaining in its portfolio as of September 30, 2021 and believes that the majority of these loans will be forgiven by the SBA. In determining an appropriate amount for the allowance, the Bank segments and evaluates the loan portfolio based on Federal call report codes, which are based on collateral or purpose. The following portfolio classes have been identified: 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. Loans are secured by first liens on the primary residence or investment property. Primary risk characteristics associated with 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 loss exposure for the Bank. Home Equity Lines of Credit . The Bank provides revolving lines of credit against one to four family residences in the Tri-State area. Primary risk characteristics associated with home equity lines of credit typically involve: major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as for major medical issues or catastrophic events; and divorce or death. In addition, home equity lines of credit typically are made with variable or floating interest rates, 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 loss exposure for the Bank. Junior Lien Loan on Residence . The Bank provides junior lien loans (“JLL”) against one to four family properties in the Tri-State area. JLLs can be either in the form of an amortizing 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. Primary risk characteristics associated with JLLs typically involve: major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as for major medical issues or catastrophic events; and divorce or death. Further, real estate values could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential loss exposure for the Bank. Multifamily and Commercial Real Estate Loans . The Bank provides mortgage loans for multifamily properties (i.e. buildings which have five or more residential units) and other commercial real estate that is either owner occupied 12 or managed as an investment property (non-owner occupied) in the Tri-State area and Pennsylvania. Commercial real estate properties primarily include retail buildings/shopping centers, hotels, office/medical buildings and industrial/warehouse space. Some properties are considered “mixed use” as they are a combination of building types, such as a building with retail space on the ground floor and either residential apartments or office suites on the upper floors. 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, property management and 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 its ability to repay the loan. 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 economic conditions. 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 a company, if privately held. Commercial and industrial loans are typically repaid first by the cash flows generated by the borrower’s business operations. 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. To mitigate the risk characteristics of commercial and industrial loans, these loans often include commercial real estate as collateral to strengthen the Bank’s position and the Bank will often require more frequent reporting requirements from the borrower in order to better monitor its business performance. However, the ability of the Bank to foreclose and realize sufficient value from the assets is often highly uncertain. Leasing and Equipment Finance . PCC 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 through 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 higher costs and expenses related to the repossession, refurbishment, re-marketing and or re-leasing of assets. 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. Leases: At inception, contracts are evaluated to determine whether the contract constitutes a lease agreement. For contracts that are determined to be an operating lease, a corresponding right-of-use (“ROU”) asset and operating lease liability are recorded in separate line items on the statement of condition. A ROU asset represents the Company’s right to use an underlying asset during the lease term and a lease liability represents the Company’s commitment to make contractually obligated lease payments. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease and are based on the present value of lease payments over the lease term. The measurement of the operating lease ROU asset includes any lease payments made. If the rate implicit in the lease is not readily determinable, the incremental collateralized borrowing rate is used to determine the present value of lease payments. This rate gives consideration to the applicable FHLB collateralized borrowing rates and is based on the information available at the commencement date. The Company has elected to apply the short-term lease measurement and recognition exemption to leases with an initial term of 12 months or less; therefore, these leases are not recorded on the Company’s statement of condition, but rather, lease expense is recognized over the lease term on a straight-line basis. The 13 Company’s lease agreements may include options to extend or terminate the lease. The Company’s decision to exercise renewal options is based on an assessment of its current business needs and market factors at the time of the renewal. The Company maintains certain property and equipment under direct financing and operating leases. Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branches and office space and are classified as operating leases. The ROU asset is measured at the amount of the lease liability adjusted for lease incentives received, any cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term, any unamortized initial direct costs, and any impairment of the ROU asset. Operating lease expense consists of: a single lease cost allocated over the remaining lease term on a straight-line basis, variable lease payments not included in the lease liability, and any impairment of the ROU asset. There are no terms or conditions related to residual value guarantees and no restrictions or covenants that would impact the Company’s ability to pay dividends or to incur additional financial obligations. Derivatives: At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company’s intentions and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation. For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. For cash flow hedges, changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as non-interest income. When hedge accounting is discontinued on a fair value hedge that no longer qualifies as an effective hedge, the derivative continues to be reported at fair value in the statement of condition, but the carrying amount of the hedged item is no longer adjusted for future changes in fair value. The adjustment to the carrying amount of the hedged item that existed at the date hedge accounting is discontinued is amortized over the remaining life of the hedged item into earnings. Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged. The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminated, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended. When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings. The Company also offers facility specific / loan level swaps to its customers and offsets its exposure from such contracts by entering into mirror image swaps with a financial institution / swap counterparty (loan level / back-to-back swap program). The customer accommodations and any offsetting swaps are treated as non-hedging derivative instruments which do not qualify for hedge accounting (“standalone derivatives”). The notional amount of the swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual contracts. The fair value of the swaps is recorded as both an asset and a liability, in other assets and other liabilities, respectively, in equal amounts for these transactions. The Company is exposed to losses if a customer counterparty fails to make its payments under a contract in which the Company is in a net receiving position. At this time, the Company anticipates that its counterparties will be able to fully satisfy their obligations under the agreements. All of the contracts to which the Company is a party settle monthly. Further, the Company has netting agreements with the dealers with which it does business. Stock-Based Compensation: The Company’s 2006 Long-Term Stock Incentive Plan, 2012 Long-Term Stock Incentive Plan and 2021 Long-Term Stock Incentive Plan allow the granting of shares of the Company’s common stock as incentive stock options, nonqualified stock options, restricted stock awards, restricted stock units and stock appreciation rights to directors, officers and employees of the Company and its subsidiaries. There are no shares remaining for issuance with respect to the stock option plan 14 approved in 2002, however options granted under this plan are still included in the amounts below. O ptions granted under these plans are, in general, exercisable not earlier than one year after the date of grant, at a price equal to the fair value of common stock on the date of grant and expire not more than ten years after the date of grant. Stock options may vest during a period of up to five years after the date of grant. Some options granted to officers at or above the senior vice president level were immediately exercisable at the date of grant. The Company has a policy of using authorized but unissued shares to satisfy option exercises. Upon adoption of Accounting Standards Update (“ASU”) 2016-09, “Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting,” the Company has elected to account for forfeitures as they occur, rather than estimate expected forfeitures. For the Company’s stock option plans, changes in options outstanding during the nine months ended September 30, 2021 were as follows: Weighted Weighted Average Aggregate Average Remaining Intrinsic Number of Exercise Contractual Value Options Price Term (In thousands) Balance, January 1, 2021 50,660 $ 13.59 Exercised during 2021 ( 3,220 ) 12.80 Expired during 2021 — — Forfeited during 2021 ( 2,680 ) 13.24 Balance, September 30, 2021 44,760 $ 13.67 0.97 years $ 881 Vested and expected to vest 44,760 $ 13.67 0.97 years $ 881 Exercisable at September 30, 2021 44,760 $ 13.67 0.97 years $ 881 The aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the third quarter of 2021 and the exercise price, multiplied by the number of in-the-money options. The Company’s closing stock price on September 30, 2021 was $ 33.36 . There were no stock options granted during the three or nine months ended September 30, 2021. The Company issued performance-based and service-based restricted stock units in 2021 and 2020. Service-based units vest ratably over a three- or five-year period. There were no service-based restricted stock units granted during the third quarter of 2021. The performance-based awards are dependent upon the Company meeting certain performance criteria and, to the extent the performance criteria are met, will cliff vest at the end of the performance period, which is generally three years. There were no performance-based restricted stock units granted in the third quarter of 2021. Changes in non-vested shares dependent on performance criteria for the nine months ended September 30, 2021 were as follows: Weighted Average Number of Grant Date Shares Fair Value Balance, January 1, 2021 221,600 $ 20.47 Granted during 2021 51,710 31.36 Vested during 2021 ( 36,032 ) 35.33 Forfeited during 2021 ( 11,843 ) 26.32 Balance, September 30, 2021 225,435 $ 20.29 15 Changes in service-based restricted stock awards/units for the nine months ended September 30, 2021 were as follows: Weighted Average Number of Grant Date Shares Fair Value Balance, January 1, 2021 777,166 $ 19.24 Granted during 2021 211,356 31.36 Vested during 2021 ( 252,316 ) 22.01 Forfeited during 2021 ( 24,309 ) 17.13 Balance, September 30, 2021 711,897 $ 21.93 As of September 30, 2021, there was $ 14.3 million of total unrecognized compensation cost related to service-based and performance-based units. That cost is expected to be recognized over a weighted average period of 1.52 years. Stock compensation expense of $ 1.8 million was recorded for both the third quarters of 2021 and 2020, respectively. Stock compensation expense recorded for the nine months ended Septembers 30, 2021 and 2020 totaled $ 5.3 million and $ 5.1 million, respectively. Employee Stock Purchase Plan (“ESPP”): In July 2019, the Board appointed ESPP committee revised the ESPP. The ESPP provides for the granting of rights to purchase up to 150,000 shares of Peapack-Gladstone Financial Corporation common stock. In May 2020, shareholders approved an increase of 200,000 shares of Peapack-Gladstone Financial Corporation common stock to be issued under the ESPP. Subject to certain eligibility requirements and restrictions, the ESPP provided for a single Offering Period of twelve months in duration, which commenced on May 16, 2019 and ended on May 15, 2020. The ESPP was revised to allow for the purchase of shares during four three-month Offering Periods of each calendar year. The Offering Periods are February 16, May 16, August 16 and November 16 of each calendar year. Each participant in the Offering Period is granted an option to purchase a number of shares and may contribute between one percent and 15 percent of their compensation. At the end of each Offering Period on the purchase date, the number of shares to be purchased by the employee is determined by dividing the employee’s contributions accumulated during the Offering Period by the applicable purchase price. The purchase price is an amount equal to 85 percent of the closing market price of a share of common stock on the purchase date. Participation in the ESPP is entirely voluntary and employees can cancel their purchases at any time during the period without penalty. The fair value of each share purchase right is determined using the Black-Scholes option pricing model. The Company recorded $ 37,000 and $ 9,000 of expense in salaries and employee benefits expense for the three months ended September 30, 2021 and 2020, respectively related to the ESPP. Total shares issued under the ESPP during the third quarter of 2021 and 2020 were 6,889 and 5,598 , respectively. The Company recorded $ 93,000 and $ 199,000 of expense in salaries and employee benefits expense for the nine months ended September 30, 2021 and 2020, respectively related to the ESPP. Total shares issued under the ESPP for the nine months ended September 30, 2021 and 2020 were 21,661 and 52,533 , respectively. Earnings per share – Basic and Diluted: The following is a reconciliation of the calculation of basic and diluted earnings per share. Basic net income per share is calculated by dividing net income available to shareholders by the weighted average shares outstanding during the reporting period. Diluted net income per share is computed similarly to that of basic net income per share, except that the denominator is increased to include the number of additional shares that would have been outstanding utilizing the Treasury Stock Method if all shares underlying potentially dilutive stock options were issued and all restricted stock, stock warrants or restricted stock units were to vest during the reporting period. 16 Three Months Ended Nine Months Ended September 30, September 30, (Dollars in thousands, except per share data) 2021 2020 2021 2020 Net income available to common shareholders $ 14,171 $ 13,547 $ 41,767 $ 23,162 Basic weighted average shares outstanding 18,763,316 18,908,337 18,891,601 18,879,688 Plus: common stock equivalents 510,515 224,313 498,921 172,917 Diluted weighted average shares outstanding 19,273,831 19,132,650 19,390,522 19,052,605 Net income per share Basic $ 0.76 $ 0.72 $ 2.21 $ 1.23 Diluted 0.74 0.71 2.15 1.22 For the three months ended September 30, 2021 all restricted stock units were included in the computation of diluted earnings per share because they were all dilutive. For the three months ended September 30, 2020, restricted stock units totaling 374,366 were not included in the computation of diluted earnings per share because they were anti-dilutive. For the nine months ended September 30, 2021 and 2020, restricted stock units totaling 261,610 and 207,466 were not included in the computation of diluted earnings per share because they were anti-dilutive. Anti-dilutive shares are common stock equivalents with weighted average exercise prices in excess of the average market value for the periods presented. Income Taxes: The Company files a consolidated Federal income tax return. Separate state income tax returns are filed for each subsidiary based on current laws and regulations. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in its financial statements or tax returns. The measurement of deferred tax assets and liabilities is based on the enacted tax rates. Such tax assets and liabilities are adjusted for the effect of a change in tax rates in the period of enactment. The Company recognizes a tax position as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50 percent likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company is no longer subject to examination by the U.S. Federal tax authorities for years prior to 2016 or by New Jersey tax authorities for years prior to 2015. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters that will have a material effect on the financial statements. Restrictions on Cash: A large portion of cash on hand or on deposit with the Federal Reserve Bank (“FRB”) was required to meet regulatory reserve and clearing requirements. Prior to March 2020, reserves were in the form of cash and balances with the FRB and included in interest-earning deposits in our statement of condition. The FRB suspended cash reserve requirements effective March 26, 2020. Comprehensive Income/(Loss): Comprehensive income/(loss) consists of net income and the change during the period in the Company’s net unrealized gains or losses on securities available for sale and unrealized gains and losses on cash flow hedge, net of tax, less adjustments for realized gains and losses. Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Risks and Uncertainties: The COVID-19 pandemic has had a devastating effect on businesses both locally and nationally. As a result, Congress passed the CARES Act to provide economic assistance to American workers, families and businesses. The CARES Act contains substantial tax and spending provisions including direct financial aid to American families, extensive emergency funding for hospitals and medical providers, and economic stimulus to significant impacted industry sectors. 17 The Company expects COVID-19 to have a n impact on our operations but cannot determine or estimate the full impact at this time. It is possible that estimates made in the Company’s consolidated financial statements could be materially and adversely impacted as a result of the conditions created by COVID-19 , including estimates regarding expected provision for loan and lease losses and impairment of goodwill. Goodwill and Other Intangible Assets: Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree (if any), over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. The Company has selected December 31 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill, which includes assembled workforce has an indefinite life on our statement of financial condition. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill and assembled workforce are the intangible assets with an indefinite life on our balance sheet. Other intangible assets, which primarily consist of customer relationship intangible assets arising from acquisitions, are amortized on an accelerated basis over their estimated useful lives, which range from 5 to 15 years . 2. INVESTMENT SECURITIES AVAILABLE FOR SALE A summary of amortized cost and approximate fair value of investment securities available for sale included in the Consolidated Statements of Condition as of September 30, 2021 and December 31, 2020 follows: September 30, 2021 Gross Gross Amortized Unrealized Unrealized Fair (In thousands) Cost Gains Losses Value U.S government-sponsored agencies $ 280,102 $ — $ ( 5,669 ) $ 274,433 Mortgage-backed securities–residential 515,651 5,663 ( 6,183 ) 515,131 SBA pool securities 43,685 95 ( 850 ) 42,930 State and political subdivisions 5,696 54 — 5,750 Corporate bond 5,500 35 — 5,535 Total $ 850,634 $ 5,847 $ ( 12,702 ) $ 843,779 December 31, 2020 Gross Gross Amortized Unrealized Unrealized Fair (In thousands) Cost Gains Losses Value U.S. treasuries $ 2,613 $ — $ — $ 2,613 U.S. government-sponsored agencies 84,424 2 ( 655 ) 83,771 Mortgage-backed securities–residential 467,915 8,604 ( 461 ) 476,058 SBA pool securities 49,457 31 ( 359 ) 49,129 State and political subdivisions 7,987 102 — 8,089 Corporate bond 3,000 29 — 3,029 Total $ 615,396 $ 8,768 $ ( 1,475 ) $ 622,689 18 The following tables present the Company’s available for sale securities in a continuous unrealized loss position and the approximate fair value of these investments as of September 30, 2021 and December 31, 2020. September 30, 2021 Duration of Unrealized Loss Less Than 12 Months 12 Months or Longer Total Approximate Approximate Approximate Fair Unrealized Fair Unrealized Fair Unrealized (In thousands) Value Losses Value Losses Value Losses U.S government-sponsored agencies $ 259,893 $ ( 5,209 ) $ 14,540 $ ( 460 ) $ 274,433 $ ( 5,669 ) Mortgage-backed securities-residential 288,682 ( 6,015 ) 14,707 ( 168 ) 303,389 ( 6,183 ) SBA pool securities 23,631 ( 330 ) 10,577 ( 520 ) 34,208 ( 850 ) Total $ 572,206 $ ( 11,554 ) $ 39,824 $ ( 1,148 ) $ 612,030 $ ( 12,702 ) December 31, 2020 Duration of Unrealized Loss Less Than 12 Months 12 Months or Longer Total Approximate Approximate Approximate Fair Unrealized Fair Unrealized Fair Unrealized (In thousands) Value Losses Value Losses Value Losses U.S. government-sponsored agencies $ 73,769 $ ( 655 ) $ — $ — $ 73,769 $ ( 655 ) Mortgage-backed securities-residential 103,340 ( 430 ) 13,914 ( 31 ) 117,254 ( 461 ) SBA pool securities 39,720 ( 343 ) 2,095 ( 16 ) 41,815 ( 359 ) Total $ 216,829 $ ( 1,428 ) $ 16,009 $ ( 47 ) $ 232,838 $ ( 1,475 ) Management believes that the unrealized losses on investment securities available for sale are temporary and are due to interest rate fluctuations and/or volatile market conditions rather than the credit-worthiness of the issuers. As of September 30, 2021, the Company does not intend to sell these securities nor is it likely that it will be required to sell the securities before their anticipated recovery; therefore, none of the securities in an unrealized loss position were determined to be other-than-temporarily impaired. T he Company has an investment in a CRA investment fund with a fair value of $ 14.8 million at September 30, 2021. The investment is classified as an equity security in our Consolidated Statements of Condition. This security had a loss of $ 70,000 for the three months ended September 30, 2021 and a loss of $ 293,000 for the nine months ended September 30, 2021. This amount is included in securities gains/(losses), net on the Consolidated Statements of Income . 3. LOANS AND LEASES Loans outstanding, excluding those held for sale, by general ledger classification, as of September 30, 2021 and December 31, 2020, consisted of the following: % of % of September 30, Totals December 31, Total (Dollars in thousands) 2021 Loans 2020 Loans Residential mortgage $ 507,865 11.10 % $ 502,829 11.50 % Multifamily mortgage 1,497,683 32.73 1,126,946 25.77 Commercial mortgage 680,107 14.87 691,294 15.81 Commercial loans (including equipment financing) (A) 1,790,579 39.13 1,950,981 44.62 Commercial construction 25,718 0.56 12,600 0.29 Home equity lines of credit 42,512 0.93 50,545 1.15 Consumer loans, including fixed rate home equity loans 30,689 0.67 37,016 0.85 Other loans 245 0.01 226 0.01 Total loans $ 4,575,398 100.00 % $ 4,372,437 100.00 % (A) Includes PPP loans of $ 49 million at September 30, 2021 and $ 196 million at December 31, 2020. 19 In determining an appropriate amount for the allowance, the Bank segments and evaluates the loan portfolio based on federal Call Report codes. The following portfolio classes have been identified as of September 30, 2021 and December 31, 2020: % of % of September 30, Totals December 31, Total (Dollars in thousands) 2021 Loans 2020 Loans Primary residential mortgage $ 514,271 11.25 % $ 512,841 11.74 % Home equity lines of credit 42,512 0.93 50,545 1.16 Junior lien loan on residence 3,218 0.07 4,527 0.10 Multifamily property 1,497,683 32.76 1,126,946 25.79 Owner-occupied commercial real estate 239,674 5.24 253,447 5.80 Investment commercial real estate 981,490 21.47 995,613 22.79 Commercial and industrial (A) 916,192 20.04 1,059,399 24.24 Lease financing 308,351 6.74 305,931 7.00 Farmland/agricultural production 4,461 0.10 3,068 0.07 Commercial construction loans 25,862 0.57 12,773 0.29 Consumer and other loans 38,032 0.83 44,483 1.02 Total loans 4,571,746 100.00 % 4,369,573 100.00 % Net deferred costs 3,652 2,864 Total loans including net deferred costs $ 4,575,398 $ 4,372,437 (A) Includes PPP loans of $ 49 million at September 30, 2021 and $ 196 million at December 31, 2020. The following tables present the loan balances by portfolio class, based on impairment method, and the corresponding balances in the allowance for loan and lease losses (ALLL) as of September 30, 2021 and December 31, 2020: September 30, 2021 Total Ending ALLL Total Ending ALLL Loans Attributable Loans Attributable Individually To Loans Collectively To Loans Evaluated Individually Evaluated Collectively Total For Evaluated for For Evaluated for Total Ending (In thousands) Impairment Impairment Impairment Impairment Loans ALLL Primary residential mortgage $ 2,886 $ 80 $ 511,385 $ 1,995 $ 514,271 $ 2,075 Home equity lines of credit — — 42,512 119 42,512 119 Junior lien loan on residence — — 3,218 7 3,218 7 Multifamily property — — 1,497,683 10,568 1,497,683 10,568 Owner-occupied commercial real estate 494 — 239,180 2,293 239,674 2,293 Investment commercial real estate 19,887 7,137 961,603 22,847 981,490 29,984 Commercial and industrial (A) 3,074 — 913,118 16,266 916,192 16,266 Lease financing — — 308,351 3,369 308,351 3,369 Farmland/agricultural production — — 4,461 58 4,461 58 Commercial construction loans — — 25,862 165 25,862 165 Consumer and other loans — — 38,032 229 38,032 229 Total ALLL $ 26,341 $ 7,217 $ 4,545,405 $ 57,916 $ 4,571,746 $ 65,133 20 (A) The balance includes PPP loans of $ 49 million, which had no related reserve as these loans are guaranteed by the SBA . December 31, 2020 Total Ending ALLL Total Ending ALLL Loans Attributable Loans Attributable Individually To Loans Collectively To Loans Evaluated Individually Evaluated Collectively Total For Evaluated for For Evaluated for Total Ending (In thousands) Impairment Impairment Impairment Impairment Loans ALLL Primary residential mortgage $ 1,490 $ 3 $ 511,351 $ 2,902 $ 512,841 $ 2,905 Home equity lines of credit — — 50,545 218 50,545 218 Junior lien loan on residence — — 4,527 15 4,527 15 Multifamily property — — 1,126,946 9,945 1,126,946 9,945 Owner-occupied commercial real estate 807 — 252,640 3,050 253,447 3,050 Investment commercial real estate 4,593 — 991,020 27,713 995,613 27,713 Commercial and industrial (A) 9,314 2,700 1,050,085 16,347 1,059,399 19,047 Lease financing — — 305,931 3,936 305,931 3,936 Farmland/agricultural production — — 3,068 43 3,068 43 Commercial construction loans — — 12,773 158 12,773 158 Consumer and other loans — — 44,483 279 44,483 279 Total ALLL $ 16,204 $ 2,703 $ 4,353,369 $ 64,606 $ 4,369,573 $ 67,309 (A) The balance includes PPP loans of $ 196 million, which had no related reserve as these loans are guaranteed by the SBA. Impaired loans include nonaccrual loans of $ 25.9 million at September 30, 2021 and $ 11.4 million at December 31, 2020. Included in impaired loans is a commercial real estate loan with a balance of $ 19.9 million and specific reserves of $ 7.1 million at September 30, 2021. Impaired loans also include performing TDR loans of $ 416,000 at September 30, 2021 and $ 201,000 at December 31, 2020. The allowance allocated to TDR loans totaled $ 57,000 and $ 3,000 at September 30, 2021 and December 31, 2020, respectively, of which no ne was allocated to nonaccrual loans. All accruing TDR loans were paying in accordance with restructured terms as of September 30, 2021. The Company has not committed to lend additional amounts as of September 30, 2021 to customers with outstanding loans that are classified as TDR loans. The following tables present loans individually evaluated for impairment by class of loans as of September 30, 2021 and December 31, 2020 (The average impaired loans on the following tables represent year to date impaired loans): September 30, 2021 Unpaid Average Principal Recorded Specific Impaired (In thousands) Balance Investment Reserves Loans With no related allowance recorded: Primary residential mortgage $ 1,947 $ 1,750 $ — $ 1,789 Owner-occupied commercial real estate 521 494 — 564 Commercial and industrial 4,986 3,074 — 3,289 Total loans with no related allowance $ 7,454 $ 5,318 $ — $ 5,642 With related allowance recorded: Primary residential mortgage $ 1,136 $ 1,136 $ 80 $ 489 Investment commercial real estate 19,887 19,887 7,137 2,210 Total loans with related allowance $ 21,023 $ 21,023 $ 7,217 $ 2,699 Total loans individually evaluated for impairment $ 28,477 $ 26,341 $ 7,217 $ 8,341 21 December 31, 2020 Unpaid Average Principal Recorded Specific Impaired (In thousands) Balance Investment Reserves Loans With no related allowance recorded: Primary residential mortgage $ 1,601 $ 1,328 $ — $ 5,544 Owner-occupied commercial real estate 817 807 — 516 Investment commercial real estate 4,593 4,593 — 6,582 Commercial and industrial 7,137 4,314 — 1,677 Total loans with no related allowance $ 14,148 $ 11,042 $ — $ 14,319 With related allowance recorded: Primary residential mortgage $ 162 $ 162 $ 3 $ 526 Commercial and industrial 5,000 5,000 2,700 4,140 Total loans with related allowance $ 5,162 $ 5,162 $ 2,703 $ 4,666 Total loans individually evaluated for impairment $ 19,310 $ 16,204 $ 2,703 $ 18,985 Interest income recognized on impaired loans for the quarters ended September 30, 2021 and 2020 was not material. The Company did not recognize any income on non-accruing impaired loans for the three months and nine months ended September 30, 2021 and 2020. The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2021 and December 31, 2020: September 30, 2021 Loans Past Due 90 Days or Over And Still (In thousands) Nonaccrual Accruing Interest Primary residential mortgage $ 2,495 $ — Owner-occupied commercial real estate 494 — Investment commercial real estate 19,887 Commercial and industrial 3,049 — Total $ 25,925 $ — December 31, 2020 Loans Past Due 90 Days or Over And Still (In thousands) Nonaccrual Accruing Interest Primary residential mortgage $ 1,328 $ — Owner-occupied commercial real estate 807 — Commercial and industrial 9,275 — Total $ 11,410 $ — The following tables present the aging of the recorded investment in past due loans as of September 30, 2021 and December 31, 2020 by class of loans, excluding nonaccrual loans: September 30, 2021 30-59 60-89 90 Days or Days Days Greater Total (In thousands) Past Due Past Due Past Due Past Due Primary residential mortgage $ 997 $ — $ — $ 997 Home equity lines of credit 114 — — 114 Commercial and industrial 17 65 — 82 Total $ 1,128 $ 65 $ — $ 1,193 22 December 31, 2020 30-59 60-89 90 Days or Days Days Greater Total (In thousands) Past Due Past Due Past Due Past Due Primary residential mortgage $ 2,900 $ 141 $ — $ 3,041 Home equity lines of credit 181 — — 181 Junior lien loan on residence — 25 — 25 Multifamily property — 269 — 269 Owner-occupied commercial real estate 268 — — 268 Commercial and industrial 497 772 — 1,269 Total $ 3,846 $ 1,207 $ — $ 5,053 Credit Quality Indicators: The Company places all commercial loans into various credit risk rating categories based on an assessment of the expected ability of the borrowers to properly service their debt. The assessment considers numerous factors including, but not limited to, current financial information on the borrower, historical payment experience, strength of any guarantor, nature of and value of any collateral, acceptability of the loan structure and documentation, relevant public information and current economic trends. This credit risk rating analysis is performed when the loan is initially underwritten and then annually based on set criteria in the loan policy. In addition, the Bank has engaged an independent loan review firm to validate risk ratings and to ensure compliance with our policies and procedures. This review of the following types of loans is performed quarterly: • A large sample of relationships or new lending to existing relationships greater than $ 1,000,000 booked since the prior review; • All criticized and classified rated borrowers with relationship exposure of more than $ 500,000 ; • A large sample of Pass-rated (including Pass Watch) borrowers with total relationships in excess of $ 1,000,000 and a small sample of Pass related relationships less than $ 1,000,000 ; • All leveraged loans of $ 1,000,000 or greater; • At least two borrowing relationships managed by each commercial banker; • Any new Regulation “O” loan commitments over $ 1,000,000 ; and • Any other credits requested by Bank senior management or a member of the Board of Directors and any borrower for which the reviewer determines a review is warranted based upon knowledge of the portfolio, local events, industry stresses, etc. The review excludes borrowers with commitments of less than $ 500,000 . The Company uses the following regulatory definitions for criticized and classified risk ratings: Special Mention: These loans have a potential weakness that deserves Management’s close attention. If left uncorrected, the potential weaknesses may result in deterioration of the repayment prospects for the loans or of the institution’s credit position at some future date. Substandard: These loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful: These loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values. 23 Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. Loans that are considered to be impaired are individually evaluated for potential loss and allowance adequacy. Loans not deemed impaired are collectively evaluated for potential loss and allowance adequacy. As of September 30, 2021, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: Special (In thousands) Pass Mention Substandard Doubtful Primary residential mortgage $ 507,378 $ 325 $ 6,568 $ — Home equity lines of credit 42,047 — 465 — Junior lien loan on residence 3,200 — 18 — Multifamily property 1,484,408 12,933 342 — Owner-occupied commercial real estate 229,482 9,441 751 — Investment commercial real estate 882,526 79,077 19,887 — Commercial and industrial 878,203 14,083 23,906 — Lease financing 308,351 — — — Farmland/agricultural production 4,461 — — — Commercial construction loans 25,786 76 — — Consumer and other loans 38,032 — — — Total $ 4,403,874 $ 115,935 $ 51,937 $ — As of December 31, 2020, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: Special (In thousands) Pass Mention Substandard Doubtful Primary residential mortgage $ 504,795 $ 1,398 $ 6,648 $ — Home equity lines of credit 50,068 — 477 — Junior lien loan on residence 4,483 — 44 — Multifamily property 1,121,145 5,441 360 — Owner-occupied commercial real estate 240,638 10,417 2,392 — Investment commercial real estate 893,115 91,162 11,336 — Commercial and industrial 989,281 53,604 16,514 — Lease financing 305,931 — — — Farmland/agricultural production 3,068 — — — Commercial construction loans 12,692 81 — — Consumer and other loans 44,483 — — — Total $ 4,169,699 $ 162,103 $ 37,771 $ — At September 30, 2021, $ 26.3 million of substandard loans were also considered impaired, compared to $ 16.2 million at December 31, 2020. The increase in substandard loans was primarily due to the downgrade of one commercial real estate loan with a balance of $ 19.9 million at September 30, 2021. 24 The activity in the allowance for loan and lease losses for the three months ended September 30, 2021 is summarized below: July 1, September 30, 2021 2021 Beginning Provision Ending (In thousands) ALLL Charge-offs Recoveries (Credit) ALLL Primary residential mortgage $ 2,167 $ — $ — $ ( 92 ) $ 2,075 Home equity lines of credit 123 — — ( 4 ) 119 Junior lien loan on residence 8 — — ( 1 ) 7 Multifamily property 10,615 — — ( 47 ) 10,568 Owner-occupied commercial real estate 2,447 — — ( 154 ) 2,293 Investment commercial real estate 27,886 — — 2,098 29,984 Commercial and industrial 16,565 ( 19 ) 50 ( 330 ) 16,266 Lease financing 3,275 — — 94 3,369 Farmland/agricultural production 43 — — 15 58 Commercial construction loans 159 — — 6 165 Consumer and other loans 217 ( 4 ) 1 15 229 Total ALLL $ 63,505 $ ( 23 ) $ 51 $ 1,600 $ 65,133 The activity in the allowance for loan and lease losses for the three months ended September 30, 2020 is summarized below: July 1, September 30, 2020 2020 Beginning Provision Ending (In thousands) ALLL Charge-offs Recoveries (Credit) ALLL Primary residential mortgage $ 3,074 $ — $ 217 $ ( 324 ) $ 2,967 Home equity lines of credit 244 — 3 ( 27 ) 220 Junior lien loan on residence 20 — — ( 2 ) 18 Multifamily property 9,662 — — 1,002 10,664 Owner-occupied commercial real estate 3,177 — — ( 166 ) 3,011 Investment commercial real estate 29,866 ( 5,132 ) — 4,432 29,166 Commercial and industrial 16,218 ( 164 ) 6 112 16,172 Lease financing 3,349 — — 124 3,473 Farmland/agricultural production 38 — — ( 23 ) 15 Commercial construction loans 49 — — 28 77 Consumer and other loans 368 ( 2 ) 2 ( 6 ) 362 Total ALLL $ 66,065 $ ( 5,298 ) $ 228 $ 5,150 $ 66,145 The activity in the allowance for loan and lease losses for the nine months ended September 30, 2021 is summarized below: January 1, September 30, 2021 2021 Beginning Provision Ending (In thousands) ALLL Charge-offs Recoveries (Credit) ALLL Primary residential mortgage $ 2,905 $ ( 12 ) $ — $ ( 818 ) $ 2,075 Home equity lines of credit 218 — 85 ( 184 ) 119 Junior lien loan on residence 15 — — ( 8 ) 7 Multifamily property 9,945 — — 623 10,568 Owner-occupied commercial real estate 3,050 — — ( 757 ) 2,293 Investment commercial real estate 27,713 — — 2,271 29,984 Commercial and industrial 19,047 ( 5,019 ) 60 2,178 16,266 Lease financing 3,936 — — ( 567 ) 3,369 Farmland/agricultural production 43 — — 15 58 Commercial construction loans 158 — — 7 165 Consumer and other loans 279 ( 24 ) 9 ( 35 ) 229 Total ALLL $ 67,309 $ ( 5,055 ) $ 154 $ 2,725 $ 65,133 25 The activity in the allowance for loan and lease losses for the nine months ended September 30, 2020 is summarized below: January 1, September 30, 2020 2020 Beginning Provision Ending (In thousands) ALLL Charge-offs Recoveries (Credit) ALLL Primary residential mortgage $ 2,090 $ — $ 330 $ 547 $ 2,967 Home equity lines of credit 128 — 8 84 220 Junior lien loan on residence 13 — — 5 18 Multifamily property 6,037 — — 4,627 10,664 Owner-occupied commercial real estate 2,064 — — 947 3,011 Investment commercial real estate 15,988 ( 5,532 ) 31 18,679 29,166 Commercial and industrial 14,353 ( 2,418 ) 11 4,226 16,172 Lease financing 2,642 — — 831 3,473 Farmland/agricultural production 38 — — ( 23 ) 15 Commercial construction loans 27 — — 50 77 Consumer and other loans 296 ( 15 ) 4 77 362 Total ALLL $ 43,676 $ ( 7,965 ) $ 384 $ 30,050 $ 66,145 Loan Modifications: 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 experiencing financial difficulty under ASC 310-40. As of September 30, 2021, the Bank had modified 542 loans with a balance of $ 947.0 million resulting in the deferral of principal and/or interest. The table below summarizes the deferrals as of September 30, 2021. All of these loans were performing in accordance with their terms prior to modification and are in conformance with the CARES Act. Included in the table below is one investment commercial real estate loan related to our back-to-back swap program totaling $ 19.9 million. Details with respect to loan modifications are as follows: Post-Modification Outstanding Number of Recorded (Dollars in thousands) Loans Investment Primary residential mortgage 3 $ 530 Investment commercial real estate 1 19,887 Commercial and industrial 4 12,657 Total 8 $ 33,074 The future performance of these loans, specifically beyond the term of the deferral, is uncertain, with the exception of one investment commercial real estate loan of $ 19.9 million for which the Company individually evaluated for impairment and recorded a specific reserve at September 30, 2021 . Troubled Debt Restructurings: The Company has allocated $ 57,000 and $ 3,000 of specific reserves on TDRs as of September 30, 2021 and December 31, 2020, respectively. There were no unfunded commitments to lend additional amounts to customers with outstanding loans that are classified as TDRs. 26 The following table presents loans by class modified as TDRs during the three-month period ended September 30, 2021: Pre-Modification Post-Modification Outstanding Outstanding Number of Recorded Recorded (Dollars in thousands) Loans Investment Investment Primary residential mortgage 2 $ 455 $ 455 Total 2 $ 455 $ 455 There were no loans modified as TDRs during the three-month period ended September 30, 2020. The following table presents loans by class modified as TDRs during the nine-month period ended September 30, 2021: Pre-Modification Post-Modification Outstanding Outstanding Number of Recorded Recorded (Dollars in thousands) Loans Investment Investment Primary residential mortgage 3 $ 1,277 $ 1,277 Commercial and industrial 1 2,194 2,194 Total 4 $ 3,471 $ 3,471 The following table presents loans by class modified as TDRs during the nine-month period ended September 30, 2020: Pre-Modification Post-Modification Outstanding Outstanding Number of Recorded Recorded (Dollars in thousands) Loans Investment Investment Primary residential mortgage 2 $ 388 $ 388 Commercial and industrial 1 39 39 Total 3 $ 427 $ 427 The identification of the TDRs did not have a significant impact on the allowance for loan and lease losses. The following table presents loans by class modified as TDRs that failed to comply with the modified terms in the twelve months following modification and resulted in a payment default at September 30, 2021: Pre-Modification Post-Modification Outstanding Outstanding Number of Recorded Recorded (Dollars in thousands) Loans Investment Investment Primary residential mortgage 1 $ 221 $ 221 Total 1 $ 221 $ 221 The following table presents loans by class modified as TDRs that failed to comply with the modified terms in the twelve months following modification and resulted in a payment default at September 30, 2020: Number of Recorded (Dollars in thousands) Loans Investment Primary residential mortgage 1 $ 193 Commercial and industrial 1 39 Total 2 $ 232 In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy. The modification of the terms of such loans may include one or more of the following: (1) a reduction of the stated interest rate of the loan to a rate that is lower than the current market rate for new debt with similar risk; (2) an extension of an interest only period for a predetermined period of time; (3) an extension of the maturity date; or (4) an extension of the amortization period over which future payments will be computed. At the time a loan is restructured, the Bank performs a full re-underwriting analysis, which includes, at a minimum, obtaining current financial statements and tax returns, copies of all leases, and an updated independent appraisal of the property. A loan will continue to 27 accrue interest if it can be reasonably determined that the borrower should be able to perform under the modified terms, that the loan has not been chronically delinquent (both to debt service and real estate taxes) or in nonaccrual status since its inception, and that there have been no charge-offs on the loan. Restructured loans with previous charge-offs would not accrue interest at the time of the TDR. At a minimum, six consecutive months of contractual payments would need to be made on a restructured loan before returning it to accrual status. Once a loan is classified as a TDR, the loan is reported as a TDR until the loan is paid in full, sold or charged-off. In rare circumstances, a loan may be removed from TDR status if it meets the requirements of ASC 310-40-50-2. 4. DEPOSITS Certificates of deposit, over $250,000, totaled $ 149.2 million and $ 186.3 million at September 30, 2021 and December 31, 2020, respectively. These totals excluded brokered certificates of deposit. The following table sets forth the details of total deposits as of September 30, 2021 and December 31, 2020: September 30, December 31, 2021 2020 (Dollars in thousands) Noninterest-bearing demand deposits $ 986,765 18.36 % $ 833,500 17.30 % Interest-bearing checking (1) 2,355,892 43.82 1,849,254 38.38 Savings 168,831 3.14 130,731 2.71 Money market 1,287,686 23.95 1,298,885 26.96 Certificates of deposit - retail 426,981 7.94 530,222 11.00 Certificates of deposit - listing service 31,382 0.58 32,128 0.67 Subtotal deposits 5,257,537 97.79 4,674,720 97.02 Interest-bearing demand - Brokered 85,000 1.58 110,000 2.28 Certificates of deposit - Brokered 33,804 0.63 33,764 0.70 Total deposits $ 5,376,341 100.00 % $ 4,818,484 100.00 % (1) Interest-bearing checking includes $ 748.7 million at September 30, 2021 and $ 652.5 million at December 31, 2020 of reciprocal balances in the Reich & Tang or Promontory Demand Deposit Marketplace program. The scheduled maturities of certificates of deposit, including brokered certificates of deposit, as of September 30, 2021 are as follows: (In thousands) 2021 $ 135,488 2022 273,758 2023 16,775 2024 30,259 2025 28,686 Over 5 Years 7,201 Total $ 492,167 5. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS There were no overnight borrowings with the FHLB as of September 30, 2021 or December 31, 2020. At September 30, 2021, unused short-term overnight borrowing commitments totaled $ 1.9 billion from the FHLB, $ 22.0 million from correspondent banks and $ 1.1 billion at the Federal Reserve Bank of New York. The Company had $ 48.5 million in borrowings from the Federal Reserve’s Paycheck Protection Plan Lending Facility (the “PPPLF”), as of September 30, 2021 as compared to $ 177.1 million at December 31, 2020. The borrowings have a rate of 0.35 percent, primarily all of which have a two-year maturity. The Company utilized the PPPLF to fund PPP loan production during the second quarter of 2020. The borrowings are fully pledged by PPP loans as of September 30, 2021. 28 During the quarter ended June 30, 2021, the Company terminated an interest rate swap with a notional amount of $ 15.0 million that was tied to a one-month FHLB advance totaling $ 15.0 million. The Company prepaid $ 105.0 million of FHLB advances 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. 6. BUSINESS SEGMENTS The Company assesses its results among two operating segments, Banking and Peapack Private. Management uses certain methodologies to allocate income and expense to the business segments. A funds transfer pricing methodology is used to assign interest income and interest expense. Certain indirect expenses are allocated to segments. These include support unit expenses such as technology and operations and other support functions. Taxes are allocated to each segment based on the effective rate for the period shown. The Banking segment’s effective tax rate for the three and nine months ended September 30, 2020 was affected by a $ 3.3 million income tax benefit recorded during the first quarter of 2020. For additional information related to this income tax benefit refer to the Income Taxes section of Management’s Discussion and Analysis. Banking The Banking segment includes: commercial (includes C&I and equipment finance), commercial real estate, multifamily, residential and consumer lending activities; treasury management services; C&I advisory services; escrow management; deposit generation; operation of ATMs; telephone and internet banking services; merchant credit card services and customer support and sales. Peapack Private Peapack Private, which includes PGB Trust & Investments of Delaware and Murphy Capital, consists of: investment management services provided for individuals and institutions; personal trust services, including services as executor, trustee, administrator, custodian and guardian; and other financial planning, tax preparation and advisory services. The following tables present the statements of income and total assets for the Company’s reportable segments for the three and nine months ended September 30, 2021 and 2020. Three Months Ended September 30, 2021 Peapack (In thousands) Banking Private Total Net interest income $ 33,780 $ 1,431 $ 35,211 Noninterest income 3,476 14,305 17,781 Total income 37,256 15,736 52,992 Provision for loan and lease losses 1,600 — 1,600 Compensation and benefits 13,079 6,780 19,859 Premises and equipment expense 3,861 598 4,459 FDIC expense 555 — 555 Other operating expense 4,657 2,655 7,312 Total operating expense 23,752 10,033 33,785 Income before income tax expense 13,504 5,703 19,207 Income tax expense 3,556 1,480 5,036 Net income $ 9,948 $ 4,223 $ 14,171 29 Three Months Ended September 30, 2020 Peapack (In thousands) Banking Private Total Net interest income $ 30,557 $ 1,592 $ 32,149 Noninterest income 9,451 10,760 20,211 Total income 40,008 12,352 52,360 Provision for loan and lease losses 5,150 — 5,150 Compensation and employee benefits 13,258 5,944 19,202 Premises and equipment expense 3,527 582 4,109 FDIC insurance expense 605 — 605 Other operating expense 2,231 2,314 4,545 Total operating expense 24,771 8,840 33,611 Income before income tax expense 15,237 3,512 18,749 Income tax expense 4,254 948 5,202 Net income $ 10,983 $ 2,564 $ 13,547 Nine Months Ended September 30, 2021 Peapack (In thousands) Banking Private Total Net interest income $ 96,405 $ 4,444 $ 100,849 Noninterest income 12,810 40,469 53,279 Total income 109,215 44,913 154,128 Provision for loan and lease losses 2,725 — 2,725 Compensation and employee benefits 43,876 17,883 61,759 Premises and equipment expense 10,950 1,696 12,646 FDIC insurance expense 1,669 — 1,669 Other operating expense 10,865 7,524 18,389 Total operating expense 70,085 27,103 97,188 Income before income tax expense 39,130 17,810 56,940 Income tax expense 10,436 4,737 15,173 Net income $ 28,694 $ 13,073 $ 41,767 Total assets at period end $ 6,144,190 $ 96,095 $ 6,240,285 Nine Months Ended September 30, 2020 Peapack (In thousands) Banking Private Total Net interest income $ 91,419 $ 4,448 $ 95,867 Noninterest income 16,036 31,318 47,354 Total income 107,455 35,766 143,221 Provision for loan and lease losses 30,050 — 30,050 Compensation and employee benefits 40,239 17,375 57,614 Premises and equipment expense 10,435 1,753 12,188 FDIC insurance expense 1,310 — 1,310 Other operating expense 7,889 6,709 14,598 Total operating expense 89,923 25,837 115,760 Income before income tax (benefit)/expense 17,532 9,929 27,461 Income tax (benefit)/expense 1,618 2,681 4,299 Net income $ 15,914 $ 7,248 $ 23,162 Total assets at period end $ 5,878,481 $ 79,626 $ 5,958,107 30 7. FAIR VALUE Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The Company used the following methods and significant assumptions to estimate the fair value: Investment Securities: The fair values for investment securities are determined by quoted market prices (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Loans Held for Sale, at Fair Value: The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2). Derivatives : The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan and lease losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Impaired loans may, in some cases, also be measured by the discounted cash flow methodology where payments are anticipated. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (“OREO") are measured at fair value, less estimated costs to sell. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by Management. Once received, a third party conducts a review of the appraisal for compliance with the Uniform Standards of Professional Appraisal Practice and appropriate analysis methods for the type of property. Subsequently, a member of the Credit Department reviews the assumptions and approaches utilized in the appraisal, as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Appraisals on collateral dependent impaired loans and other real estate owned (consistent for all loan types) are obtained on an annual basis, unless a significant change in the market or other factors warrants a more frequent appraisal. On an annual basis, Management compares the actual selling price of any collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value for other properties. The most recent analysis performed indicated that a discount up to 15 percent should be applied to appraisals on properties. The discount is determined based on the nature of the underlying properties, aging of appraisals and other factors. For each collateral-dependent impaired loan, we consider other factors, such as certain indices or other market information, as well as property specific circumstances to determine if an adjustment to the appraised value is needed. In situations where there is evidence of change in 31 value, the Bank will determine if there is a need for an adjustment to the specific reserve on the collateral dependent impaired loans. When the Bank applies an interim adjustment, it generally shows the adjustment as an incremental specific reserve against the loan until it has received the full updated appraisal. All collateral-dependent impaired loans and other real estate owned valuations were supported by an appraisal less than 12 months old or in the process of obtaining an appraisal as of September 30 , 20 2 1 . The following table summarizes, at the dates indicated, assets measured at fair value on a recurring basis, including financial assets for which the Corporation has elected the fair value option: Assets Measured on a Recurring Basis Fair Value Measurements Using Quoted Prices in Active Significant Markets For Other Significant Identical Observable Unobservable September 30, Assets Inputs Inputs (In thousands) 2021 (Level 1) (Level 2) (Level 3) Assets: Available for sale: U.S. government-sponsored agencies $ 274,433 $ — $ 274,433 $ — Mortgage-backed securities-residential 515,131 — 515,131 — SBA pool securities 42,930 — 42,930 — State and political subdivisions 5,750 — 5,750 — Corporate bond 5,535 — 5,535 — CRA investment fund 14,824 14,824 — — Loans held for sale, at fair value 3,013 — 3,013 — Derivatives: Loan level swaps 43,133 — 43,133 — Total $ 904,749 $ 14,824 $ 889,925 $ — Liabilities: Derivatives: Cash flow hedges $ 5,267 $ — $ 5,267 $ — Loan level swaps 44,483 — 44,483 — Total $ 49,750 $ — $ 49,750 $ — 32 Assets Measured on a Recurring Basis Fair Value Measurements Using Quoted Prices in Active Significant Markets For Other Significant Identical Observable Unobservable December 31, Assets Inputs Inputs (In thousands) 2020 (Level 1) (Level 2) (Level 3) Assets: Securities available for sale: U.S. treasuries $ 2,613 $ — $ 2,613 $ — U.S. government-sponsored agencies 83,771 — 83,771 — Mortgage-backed securities-residential 476,058 — 476,058 — SBA pool securities 49,129 — 49,129 — State and political subdivisions 8,089 — 8,089 — Corporate bond 3,029 — 3,029 — CRA investment fund 15,117 15,117 — — Loans held for sale, at fair value 13,588 — 13,588 — Derivatives: Loan level swaps 79,529 — 79,529 — Total $ 730,923 $ 15,117 $ 715,806 $ — Liabilities: Derivatives: Cash flow hedges $ 9,616 $ — $ 9,616 $ — Loan level swaps 79,529 — 79,529 — Total $ 89,145 $ — $ 89,145 $ — The Company has elected the fair value option for certain loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on loans held for investment. None of these loans are 90 days or more past due nor on nonaccrual as of September 30, 2021 and December 31, 2020. The following tables present residential loans held for sale, at fair value at the dates indicated: (In thousands) September 30, 2021 December 31, 2020 Residential loans contractual balance $ 2,960 $ 13,295 Fair value adjustment 53 293 Total fair value of residential loans held for sale $ 3,013 $ 13,588 There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2021. The following tables summarize, at the dates indicated, assets measured at fair value on a non-recurring basis: Fair Value Measurements Using Quoted Prices in Active Significant Markets For Other Significant Identical Observable Unobservable September 30, Assets Inputs Inputs (In thousands) 2021 (Level 1) (Level 2) (Level 3) Assets: Impaired loans: Primary residential mortgage $ 1,057 $ — $ — $ 1,057 Investment commercial real estate 12,750 — — 12,750 33 Fair Value Measurements Using Quoted Prices in Active Significant Markets For Other Significant Identical Observable Unobservable December 31, Assets Inputs Inputs (In thousands) 2020 (Level 1) (Level 2) (Level 3) Assets: Impaired loans: Commercial and industrial $ 2,300 $ — $ — $ 2,300 The carrying amounts and estimated fair values of financial instruments at September 30, 2021 are as follows: Fair Value Measurements at September 30, 2021 using Carrying (In thousands) Amount Level 1 Level 2 Level 3 Total Financial assets Cash and cash equivalents $ 616,212 $ 616,212 $ — $ — $ 616,212 Securities available for sale 843,779 — 843,779 — 843,779 CRA investment fund 14,824 14,824 — — 14,824 FHLB and FRB stock 12,950 — — — N/A Loans held for sale, at fair value 3,013 — 3,013 — 3,013 Loans held for sale, at lower of cost or fair value 17,235 — 18,627 — 18,627 Loans, net of allowance for loan and lease losses 4,510,265 — — 4,619,193 4,619,193 Accrued interest receivable 22,790 — 2,028 20,762 22,790 Accrued interest receivable loan level swaps (A) 4,688 — 4,688 — 4,688 Loan level swaps 43,133 — 43,133 — 43,133 Financial liabilities Deposits $ 5,376,341 $ 4,884,174 $ 495,816 $ — $ 5,379,990 Paycheck Protection Program Liquidity Facility 48,496 — 48,496 — 48,496 Subordinated debt 132,629 — — 130,917 130,917 Accrued interest payable 2,157 132 659 1,366 2,157 Accrued interest payable loan level swaps (B) 4,688 — 4,688 — 4,688 Cash flow hedges 5,267 — 5,267 — 5,267 Loan level swap 44,483 — 44,483 — 44,483 34 (A) Included in other assets in the Consolidated Statement of Condition. (B) Included in accrued expenses and other liabilities in the Consolidated Statement of Condition. The carrying amounts and estimated fair values of financial instruments at December 31, 2020 are as follows: Fair Value Measurements at December 31, 2020 using Carrying (In thousands) Amount Level 1 Level 2 Level 3 Total Financial assets Cash and cash equivalents $ 653,322 $ 653,322 $ — $ — $ 653,322 Securities available for sale 622,689 — 622,689 — 622,689 CRA investment fund 15,117 15,117 — — 15,117 FHLB and FRB stock 13,709 — — — N/A Loans held for sale, at fair value 13,588 — 13,588 — 13,588 Loans held for sale, at lower of cost or fair value 18,520 — 19,115 — 19,115 Loans, net of allowance for loan and lease losses 4,305,128 — — 4,462,243 4,462,243 Accrued interest receivable 22,495 — 1,653 20,842 22,495 Loan level swaps 79,529 — 79,529 — 79,529 Financial liabilities Deposits $ 4,818,484 $ 4,222,370 $ 604,036 $ — $ 4,826,406 Short-term borrowings 15,000 — 15,000 — 15,000 Paycheck Protection Program Liquidity Facility 177,086 — 177,086 — 177,086 Subordinated debt 181,794 — — 183,348 183,348 Accrued interest payable 1,650 150 1,347 153 1,650 Cash flow hedges 9,616 — 9,616 — 9,616 Loan level swaps 79,529 — 79,529 — 79,529 8. REVENUE FROM CONTRACTS WITH CUSTOMERS All of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized within noninterest income. The following tables present the sources of noninterest income for the periods indicated: For the Three Months Ended September 30, (In thousands) 2021 2020 Service charges on deposits Overdraft fees $ 117 $ 88 Interchange income 374 319 Other 468 378 Wealth management fees (a) 13,860 10,119 Other (b) 2,962 9,307 Total noninterest other income $ 17,781 $ 20,211 For the Nine Months Ended September 30, (In thousands) 2021 2020 Service charges on deposits Overdraft fees $ 297 $ 307 Interchange income 1,061 869 Other 1,343 1,120 Wealth management fees (a) 39,025 30,070 Gains on sales of OREO 51 — Other (b) 11,502 14,988 Total noninterest other income $ 53,279 $ 47,354 (a) Includes investment brokerage fees. (b) All of the other category is outside the scope of ASC 606. 35 The following table presents the sources of noninterest income by operating segment for the periods indicated: For the Three Months Ended September 30, For the Three Months Ended September 30, 2021 2020 (In thousands) Wealth Wealth Revenue by Operating Segment Banking Management Total Banking Management Total Service charges on deposits Overdraft fees $ 117 $ — $ 117 $ 88 $ — $ 88 Interchange income 374 — 374 319 — 319 Other 468 — 468 378 — 378 Wealth management fees (a) — 13,860 13,860 — 10,119 10,119 Other (b) 2,517 445 2,962 8,666 641 9,307 Total noninterest income $ 3,476 $ 14,305 $ 17,781 $ 9,451 $ 10,760 $ 20,211 For the Nine Months Ended September 30, For the Nine Months Ended September 30, (In thousands) 2021 2020 Revenue by Operating Wealth Wealth Segment Banking Management Total Banking Management Total Service charges on deposits Overdraft fees $ 297 $ — $ 297 $ 307 $ — $ 307 Interchange income 1,061 — 1,061 869 — 869 Other 1,343 — 1,343 1,120 — 1,120 Wealth management fees (a) — 39,025 39,025 — 30,070 30,070 Gains on sales of OREO 51 — 51 — — — Other (b) 10,058 1,444 11,502 13,740 1,248 14,988 Total noninterest income $ 12,810 $ 40,469 $ 53,279 $ 16,036 $ 31,318 $ 47,354 (a) Includes investment brokerage fees. (b) All of the other category is outside the scope of ASC 606. A description of the Company’s revenue streams accounted for under ASC 606 follows: Service charges on deposit accounts : The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft fees. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance. Interchange income : The Company earns interchange fees from debit cardholder transactions conducted through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Interchange income is presented gross of cardholder rewards. Cardholder rewards are included in other expenses in the statement of income. Cardholder rewards reduced interchange income for the third quarter of 2021 by $ 34,000 compared to $ 31,000 for the same quarter in 2020. Cardholder rewards reduced interchange income by $ 95,000 and $ 86,000 for the nine months ended September 30, 2021 and 2020, respectively. Wealth management fees (gross) : The Company earns wealth management fees from its contracts with wealth management clients to manage assets for investment, and/or to transact on their accounts. These fees are primarily earned over time as the Company charges its clients on a monthly or quarterly basis in accordance with its investment advisory agreements. Fees are generally assessed based on a tiered scale of the market value of AUM at month end. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed (i.e. trade date). Investment brokerage fees (net) : The Company earns fees from investment brokerage services provided to its customers by a third-party service provider. The Company receives commissions from the third-party service provider twice a month based upon 36 customer activity for the month. The fees are recognized monthly, and a receivable is recorded until commissions are generally paid by the 15 th of the following month. Because the Company (i) acts as an agent in arranging the relationship between the customer and the third-party service provider and (ii) does not control the services rendered to the customers, investment brokerage fees are presented net of related costs. Gains/(losses) on sales of OREO : The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform its obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain/(loss) on sale if a significant financing component is present. The Company recorded a gain on the sale of OREO of $ 51,000 for nine months ended September 30, 2021. Other : All of the other income items are outside the scope of ASC 606. 9. OTHER OPERATING EXPENSES The following table presents the major components of other operating expenses for the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2021 2020 2021 2020 Professional and legal fees $ 1,565 $ 1,079 $ 4,007 $ 3,095 Telephone 342 370 988 1,089 Advertising 386 226 1,004 1,294 Amortization of intangible assets 431 321 1,167 966 Branch restructure — — 228 278 Write-off of subordinated debt costs — — 648 — Other operating expenses 3,238 2,549 8,997 7,876 Total other operating expenses $ 5,962 $ 4,545 $ 17,039 $ 14,598 10. ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS) The following is a summary of the accumulated other comprehensive income/(loss) balances, net of tax, for the three months ended September 30, 2021 and 2020: Amount Other Reclassified Comprehensive Other From Income/(Loss) Comprehensive Accumulated Three Months Balance at Income/(Loss) Other Ended Balance at July 1, Before Comprehensive September 30, September 30, (In thousands) 2021 Reclassifications Income/(Loss) 2021 2021 Net unrealized holding gain/(loss) on securities available for sale, net of tax $ ( 956 ) $ ( 4,293 ) $ — $ ( 4,293 ) $ ( 5,249 ) Gain/(loss) on cash flow hedges ( 4,459 ) 673 — 673 ( 3,786 ) Accumulated other comprehensive gain/(loss), net of tax $ ( 5,415 ) $ ( 3,620 ) $ — $ ( 3,620 ) $ ( 9,035 ) 37 Amount Other Reclassified Comprehensive Other From Income/(Loss) Comprehensive Accumulated Three Months Balance at Income/(Loss) Other Ended Balance at July 1, Before Comprehensive September 30, September 30, (In thousands) 2020 Reclassifications Income/(Loss) 2020 2020 Net unrealized holding gain/(loss) on securities available for sale, net of tax $ 6,935 $ ( 777 ) $ — $ ( 777 ) $ 6,158 Gain/(loss) on cash flow hedges ( 8,931 ) 1,030 ( 4 ) 1,026 ( 7,905 ) Accumulated other comprehensive gain/(loss), net of tax $ ( 1,996 ) $ 253 $ ( 4 ) $ 249 $ ( 1,747 ) The following represents the reclassifications out of accumulated other comprehensive income/(loss) for the three months ended September 30, 2021 and 2020: Three Months Ended September 30, (In thousands) 2021 2020 Affected Line Item in Income Statement Unrealized gains/(losses) on cash flow hedge derivatives: Reclassification adjustment for amounts included in net income $ — $ ( 5 ) Interest expense Reclassification adjustment for losses on termination of swaps included in net income — — Other income Tax effect — 1 Income tax expense Total reclassifications, net of tax $ — $ ( 4 ) The following is a summary of the accumulated other comprehensive income/(loss) balances, net of tax, for the nine months ended September 30, 2021 and 2020 Amount Other Reclassified Comprehensive Other From Income/(Loss) Comprehensive Accumulated Nine Months Balance at Income/(Loss) Other Ended Balance at January 1, Before Comprehensive September 30, September 30, (In thousands) 2021 Reclassifications Income/(Loss) 2021 2021 Net unrealized holding gain/(loss) on securities available for sale, net of tax $ 5,521 $ ( 10,770 ) $ — $ ( 10,770 ) $ ( 5,249 ) Gain/(loss) on cash flow hedges ( 6,913 ) 2,521 606 3,127 ( 3,786 ) Accumulated other comprehensive gain/(loss), net of tax $ ( 1,392 ) $ ( 8,249 ) $ 606 $ ( 7,643 ) $ ( 9,035 ) 38 Amount Other Reclassified Comprehensive Other From Income/(Loss) Comprehensive Accumulated Nine Months Balance at Income/(Loss) Other Ended Balance at January 1, Before Comprehensive September 30, September 30, (In thousands) 2020 Reclassifications Income/(Loss) 2020 2020 Net unrealized holding gain/(loss) on securities available for sale, net of tax $ 1,006 $ 5,152 $ — $ 5,152 $ 6,158 Gain/(loss) on cash flow hedges ( 2,501 ) ( 5,341 ) ( 63 ) ( 5,404 ) ( 7,905 ) Accumulated other comprehensive gain/(loss), net of tax $ ( 1,495 ) $ ( 189 ) $ ( 63 ) $ ( 252 ) $ ( 1,747 ) The following represents the reclassifications out of accumulated other comprehensive income/(loss) for the nine months ended September 30, 2021 and 2020: Nine Months Ended September 30, (In thousands) 2021 2020 Affected Line Item in Income Unrealized gains/(losses) on cash flow hedge derivatives: Reclassification adjustment for amounts included in net income $ — $ ( 85 ) Interest expense Reclassification adjustment for losses on termination of swaps included in net income 842 — Other income Tax effect ( 236 ) 22 Income tax expense Total reclassifications, net of tax $ 606 $ ( 63 ) 11. DERIVATIVES The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. Interest Rate Swaps Designated as Cash Flow Hedges: Interest rate swaps with a notional amount of $ 230.0 million as of September 30, 2021 and $ 270.0 million as of December 31, 2020 were designated as cash flow hedges of certain interest-bearing deposits. On a quarterly basis, the Company performs a qualitative hedge effectiveness assessment. This assessment takes into consideration any adverse developments related to the counterparty’s risk of default and any negative events or circumstances that affect the factors that originally enabled the Company to assess that it could reasonably support, qualitatively, an expectation that the hedging relationship was and will continue to be highly effective. As of September 30, 2021, there were no events or market conditions that would result in hedge ineffectiveness. The aggregate fair value of the swaps is recorded in other assets/liabilities with changes in fair value recorded in other comprehensive income. The amount included in accumulated other comprehensive income would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining terms of the swaps. 39 The following table presents information about the interest rate swaps designated as cash flow hedges as of September 30, 2021 and December 31, 2020: (Dollars in thousands) September 30, 2021 December 31, 2020 Notional amount $ 230,000 $ 270,000 Weighted average pay rate 1.99 % 1.93 % Weighted average receive rate 0.21 % 0.22 % Weighted average maturity 1.29 years 2.02 years Unrealized loss, net $ ( 5,267 ) $ ( 9,616 ) Number of contracts 11 13 Net interest expense recorded on these swap transactions totaled $ 1.0 million and $ 3.3 million for the three and nine months ended September 30, 2021, respectively. Net interest expense recorded on these swap transactions totaled $ 1.1 million and $ 2.4 million for the three months and nine months ended September 30, 2020, respectively. Cash Flow Hedges The following table presents the net gain/(loss) recorded in accumulated other comprehensive income/(loss) and the consolidated financial statements relating to the cash flow derivative instruments for the three months and nine months ended September 30, 2021 and 2020: For the Three Months Ended September 30, For the Nine Months Ended September 30, (In thousands) 2021 2020 2021 2020 Interest rate contracts Gain/(loss) recognized in other comprehensive income (effective portion) $ 673 $ 1,026 $ 3,127 $ ( 5,404 ) Gain/(loss) reclassified from other comprehensive income to interest expense — ( 4 ) — ( 63 ) Gain/(loss) recognized in other noninterest income — — ( 842 ) — During the first quarter of 2020, the Company recognized an unrealized after-tax gain of $ 26,000 in accumulated other comprehensive income/(loss) related to the termination of three interest rate swaps designated as cash flow hedges. During the second quarter of 2019, the Company recognized an unrealized after-tax gain of $ 189,000 in accumulated other comprehensive income/(loss) related to the termination of four interest rate swaps designated as cash flow hedges. These gains were amortized into earnings over the remaining life of the terminated swaps and completed amortization as of December 31, 2020. The Company did not recognize pre-tax interest income for the three and nine months ended September 30, 2021 related to the amortization of the gain on the terminated interest rate swaps designated as cash flow hedges. The Company recognized pre-tax interest income of $ 5,000 and $ 85,000 for the three and nine months ended September 30, 2020 related to the amortization of the gain on the terminated interest rate swaps designated as cash flow hedges. During the second quarter of 2021, the Bank terminated interest rate swaps with a notional amount of $ 40.0 million. The interest rate swaps were designated as cash flow hedges in which the Bank received a variable payment from our counterparty in exchange for making fixed-rate payments over the life of the swap agreements. Due to increased liquidity levels, management made the decision to pay off certain interest-bearing deposit liabilities that were being hedged. These liabilities will not be replaced; therefore, it will no longer be probable that the original forecasted transactions subject to the cash flow hedges will occur. As a result, the pre-tax loss on the termination of the interest rate swaps of $ 842,000 was recorded in the income statement for the nine months ended September 30, 2021. 40 September 30, 2021 Notional Fair (In thousands) Amount Value Interest rate swaps related to interest-bearing deposits $ 230,000 $ ( 5,267 ) Total included in other assets — — Total included in other liabilities 230,000 ( 5,267 ) December 31, 2020 Notional Fair (In thousands) Amount Value Interest rate swaps related to interest-bearing deposits $ 270,000 $ ( 9,616 ) Total included in other assets — — Total included in other liabilities 270,000 ( 9,616 ) Derivatives Not Designated as Accounting Hedges: The Company offers facility specific/loan level swaps to its customers and offsets its exposure from such contracts by entering into mirror image swaps with a financial institution/swap counterparty (loan level / back-to-back swap program). The customer accommodations and any offsetting swaps are treated as non-hedging derivative instruments which do not qualify for hedge accounting (“standalone derivatives”). The notional amount of the swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual contracts. The fair value of the swaps is recorded as both an asset and a liability, in other assets and other liabilities, respectively, in equal amounts for these transactions. The Company recorded a swap valuation provision of $ 1.4 million related to a commercial real estate loan placed on non-accrual status during the third quarter of 2021. The accrued interest receivable and payable of $ 4.7 million related to our swaps is recorded in other assets and other liabilities as of September 30, 2021. Information about these swaps is as follows: (Dollars in thousands) September 30, 2021 December 31, 2020 Notional amount $ 730,966 $ 823,134 Fair value (A) $ 47,821 $ 79,529 Weighted average pay rates 3.98 % 4.02 % Weighted average receive rates 1.81 % 1.91 % Weighted average maturity 5.8 years 6.5 years Number of contracts 87 95 (A) The September 30, 2021 amount includes the fair value of the loan level swap asset of $ 43.1 million plus accrued interest receivable of $ 4.7 million on back-to-back swap loans. 12. SUBORDINATED DEBT In June 2016, the Company issued $ 50.0 million in aggregate principal amount of fixed-to-floating subordinated notes (the “2016 Notes”) to certain institutional investors. The 2016 Notes were non-callable for five years , had a stated maturity of June 30, 2026 , and bore interest at a fixed rate of 6.0 percent per year until June 30, 2021. From June 30, 2021 to the maturity date or early redemption date, the interest rate reset quarterly to a level equal to the then current three-month London Interbank Offered Rate (“LIBOR”) rate plus 485 basis points, payable quarterly in arrears. During the second quarter of 2021, the Company used a portion of the proceeds from the December 2020 subordinated debt issuance to redeem the $ 50.0 million June 2016 issuance. The remaining net issuance costs of $ 648,000 were written-off during the quarter ended June 30, 2021. In December 2017, the Company issued $ 35.0 million in aggregate principal amount of fixed-to-floating subordinated notes (the “2017 Notes”) to certain institutional investors. The 2017 Notes are non-callable for five years , have a stated maturity of December 15, 2027 , and bear interest at a fixed rate of 4.75 percent per year until December 15, 2022. From December 16, 2022 to the maturity date or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 254 basis points, payable quarterly in arrears. Debt issuance costs incurred totaled $ 875 ,000 and are being amortized to maturity. Approximately $ 29.1 million of the net proceeds from the sale of the 2017 Notes were contributed by the Company to the Bank in the fourth quarter of 2017. The remaining funds (approximately $ 5 million), representing three years of interest payments, were retained by the Company. 41 In December 2020, the Company issued $ 100.0 million in aggregate principal amount of fixed to floating subordinates 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 may use the proceeds from the issuance of the 2020 Notes for stock repurchases, acquisitions of wealth management firms, as well as other general corporate purposes. Subordinated debt is presented net of issuance costs 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 Services (“Moody’s). KBRA assigned an investment grade rating of BBB- and Moody’s assigned an investment grade rating of Baa3 for the 2020 Notes at the time of issuance. 13. LEASES The Company maintains certain property and equipment under direct financing and operating leases. As of September 30, 2021, the Company's operating lease ROU asset and operating lease liability totaled $ 10.3 million and $ 10.6 million, respectively. As of December 31, 2020, the Company's operating lease ROU asset and operating lease liability totaled $ 9.4 million and $ 9.7 million, respectively. A weighted average discount rate of 2.82 percent and 3.11 percent was used in the measurement of the ROU asset and lease liability as of September 30, 2021 and December 31, 2020, respectively. The Company's leases have remaining lease terms between two months to 15 years, with a weighted average lease term of 6.31 years at September 30, 2021. The Company's leases had remaining lease terms between one month to 16 years, with a weighted average lease term of 6.01 years, at December 31, 2020. The Company’s lease agreements may include options to extend or terminate the lease. The Company’s decision to exercise renewal options is based on an assessment of its current business needs and market factors at the time of the renewal. Total operating lease costs were $ 697,000 and $ 789,000 for the three months ended September 30, 2021 and 2020, respectively. The variable lease costs were $ 75,000 and $ 82,000 for the three months ended September 30, 2021 and 2020, respectively. Total operating lease costs were $ 2.1 million and $ 2.4 million for the nine months ended September 30, 2021 and 2020, respectively. The variable lease costs were $ 242,000 and $ 259,000 for the nine months ended September 30, 2021 and 2020, respectively. The following is a schedule of the Company's operating lease liabilities by contractual maturity as of September 30, 2021: (In thousands) 2021 $ 691 2022 2,560 2023 2,163 2024 1,719 2025 1,463 Thereafter 3,151 Total lease payments 11,747 Less: imputed interest 1,103 Total present value of lease payments $ 10,644 The following table shows the supplemental cash flow information related to the Company’s direct finance and operating leases for the nine months ended September 30, 2021 and 2020: 42 For the Nine Months Ended (In thousands) 2021 2020 Right-of-use asset obtained in exchange for lease obligation $ 2,772 $ 455 Operating cash flows from operating leases 1,844 2,139 Operating cash flows from direct finance leases 229 261 Financing cash flows from direct finance leases 561 561 14. ACCOUNTING PRONOUNCEMENTS On June 16, 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU replaces the incurred loss model with an expected loss model, referred to as “current expected credit loss” (“CECL”) model. It will significantly change estimates for credit losses related to financial assets measured at amortized cost, including loans receivable, and certain other contracts. The largest impact will be on lenders and the “allowance for loan and lease losses” (“ALLL”). This ASU will be effective for “public business entities” (“PBEs”) in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has elected to delay the adoption of ASU 2016-13, as approved by the CARES Act, until January 1, 2022. The Company has reviewed the potential impact to our securities portfolio, which primarily consists of U.S. government sponsored entities, mortgage-backed securities and municipal securities which have no history of credit loss and have strong credit ratings. The Company does not expect the standard to have a material impact on its financial statements as it relates to the Company’s securities portfolio. The Company is also currently evaluating the impact the CECL model will have on our accounting and allowance for loans losses. The Company has selected a third-party firm to assist in the development of a CECL model to assist in the calculation of the allowance for loan and lease losses in preparation for the change to the expected loss model. The Company has also engaged a third-party firm to perform a model validation of our CECL model. The Company is also in the process of updating its policies and internal controls accordingly. The Company expects to recognize a one-time cumulative-effect adjustment to our ALLL as of January 1, 2022, consistent with regulatory expectations set forth in interagency guidance. The Company cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our consolidated financial condition or results of operations. In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The amendments in this Update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. This ASU removes the following exceptions: exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items; exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. This ASU did not have a material impact on the Company’s consolidated financial statements. In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. The amendments in this Update provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this Update apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The amendments in this ASU can be adopted immediately and are effective through December 31, 2020. The Company is evaluating alternative reference rates including the Secured Overnight Financing Rate (“SOFR”) in preparation for a rate index replacement and the adoption of this ASU. 43 Item 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS: This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about Management’s confidence and strategies and Management’s expectations about operations, growth, financial results, new and existing programs and products, investments, relationships, opportunities and market conditions. These statements may be identified by such forward-looking terminology as “expect”, “look”, “believe”, “anticipate”, “may”, or similar statements or variations of such terms. Actual results may differ materially from such forward-looking statements. Factors that may cause results to differ materially from those contemplated by such forward-looking statements include, among others, those risk factors identified in the Company’s Form 10-K for the year ended December 31, 2020, in addition to/which include the following: • our inability to successfully grow our business and implement our strategic plan, including an inability to generate revenues to offset the increased personnel and other costs related to the strategic plan; • the impact of anticipated higher operating expenses in 2021 and beyond; • our inability to successfully integrate wealth management firm acquisitions; • our inability to manage our growth; • our inability to successfully integrate our expanded employee base; • an unexpected decline in the economy, in particular in our New Jersey and New York market areas; • declines in our net interest margin caused by the interest rate environment and/or our highly competitive market; • declines in the value in our investment portfolio; • the impact of a pandemic event on our business, operations, customers, allowance for loan losses and capital levels; • higher than expected increases in our allowance for loan and lease losses; • higher than expected increases in loan and lease losses or in the level of delinquent, nonperforming, classified and criticized loans; • changes in interest rates; • decline in real estate values within our market areas; • legislative and regulatory actions (including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Basel III and related regulations) that may result in increased compliance costs; • successful cyberattacks against our information technology (“IT”) infrastructure and that of our IT and third-party providers; • higher than expected FDIC insurance premiums; • adverse weather conditions; • our inability to successfully generate business in new geographic markets; • a reduction in our lower-cost funding sources; • our inability to adapt to technological changes; • claims and litigation pertaining to fiduciary responsibility, environmental laws and other matters; • our inability to retain key employees; • demands for loans and deposits in our market areas; • adverse changes in securities markets; • changes in accounting policies and practices; and • other unexpected material adverse changes in our operations or earnings. Further, given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and whether the gradual reopening of businesses will result in a meaningful increase in economic activity. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: • demand for our products and services may decline, making it difficult to grow assets and income; • if the economy is unable to substantially reopen, and higher levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; • collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; 44 • our allowance for loan losses may increase if borrowers experience financial difficulties, which will adversely affect our net income; • the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; • a material decrease in net income or a net loss over several quarters could result in an elimination or a decrease in the rate of our quarterly cash dividend; • our wealth management revenues may decline with continuing market turmoil; • a worsening of business and economic conditions or in the financial markets could result in an impairment of certain intangible assets, such as goodwill; • the unanticipated loss or unavailability of key employees due to the outbreak, which could harm our ability to operate our business or execute our business strategy, especially as we may not be successful in finding and integrating suitable successors; • we may face litigation, regulatory enforcement and reputation risk as a result of our participation in the PPP and the risk that the SBA may not fund some or all PPP loan guaranties; • our cyber security risks are increased as the result of an increase in the number of employees working remotely; and • FDIC premiums may increase if the agency experience additional resolution costs. Moreover, our operations depend on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the pandemic could hinder our ability to operate our business or execute our business strategy. Except as may be required by applicable law or regulation, the Company undertakes no duty to update any forward-looking statements to conform the statement to actual results or change in the Company’s expectations. Although we believe that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES: Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2020 contains a summary of the Company’s significant accounting policies. Management believes that the Company’s policy with respect to the methodology for the determination of the allowance for loan and lease losses involves a higher degree of complexity and requires Management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application are periodically reviewed with the Audit Committee and the Board of Directors. The provision for loan and lease losses is based upon Management’s evaluation of the adequacy of the allowance, including an assessment of known and inherent risks in the portfolio, giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, classified loans and nonperforming loans, detailed analysis of individual loans for which full collectability may not be assured, the existence and estimated fair value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. Although Management uses the best information available, the level of the allowance for loan and lease losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan and lease losses. Such agencies may require the Company to make additional provisions for loan and lease losses based upon information available to them at the time of their examination. Furthermore, the majority of the Company’s loans are secured by real estate in New Jersey and, to a lesser extent, New York City. Accordingly, the collectability of a substantial portion of the carrying value of the Company’s loan portfolio is susceptible to changes in local market conditions and any adverse economic conditions. Future adjustments to the provision for loan and lease losses and allowance for loan and lease losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control. The Company accounts for its debt securities in accordance with ASC 320, “Investments - Debt Securities” and its equity security in accordance with ASC 321, “Investments – Equity Securities”. All securities are classified as available for sale and are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income/(loss), net of tax, with the exception of the Company’s investment in a CRA investment fund which is classified as an equity security. In accordance with ASU 2016-01, “Financial Instruments” unrealized holding gains and losses are marked to market through the income statement. 45 EXECUTIVE SUMMARY: The following table presents certain key aspects of our performance for the three months ended September 30, 2021 and 2020. For the Three Months Ended September 30, Change (Dollars in thousands, except per share data) 2021 2020 2021 vs 2020 Results of Operations: Net interest income $ 35,211 $ 32,149 $ 3,062 Provision for loan and lease losses 1,600 5,150 (3,550 ) Net interest income after provision for loan and lease losses 33,611 26,999 6,612 Wealth management fee income (1) 13,860 10,119 3,741 Other income (2) 3,921 10,092 (6,171 ) Operating expense (3) 32,185 28,461 3,724 Income before income tax expense 19,207 18,749 458 Income tax expense 5,036 5,202 (166 ) Net income $ 14,171 $ 13,547 $ 624 Total revenue (4) $ 52,992 $ 52,360 $ 632 Diluted average shares outstanding 19,273,831 19,132,650 141,181 Diluted earnings per share $ 0.74 $ 0.71 $ 0.03 Return on average assets annualized (ROAA) 0.95 % 0.89 % 0.06 % Return on average equity annualized (ROAE) 10.40 10.53 (0.13 ) (1) The September 2021 quarter included a full quarter of wealth management fee income and expense related to the December hires of the teams from Lucas and Noyes and the July acquisition of Princeton Portfolio Strategies Group (“PPSG”). (2) The quarter ended September 30, 2020 included a gain on sale of $7.4 million on the sale of $355 million of PPP loans. (3) The September 2021 quarter included $1.4 million related to a swap valuation allowance. (4) Total revenue equals net interest income plus wealth management fee income and other income. The following table presents certain key aspects of our performance for the nine months ended September 30, 2021 and 2020. 46 For the Nine Months Ended September 30, Change (Dollars in thousands, except per share data) 2021 2020 2021 vs 2020 Results of Operations: Net interest income $ 100,849 $ 95,867 $ 4,982 Provision for loan and lease losses (1) 2,725 30,050 (27,325 ) Net interest income after provision for loan and lease losses 98,124 65,817 32,307 Wealth management fee income (2) 39,025 30,070 8,955 Other income (3) 14,254 17,284 (3,030 ) Operating expense (4) 94,463 85,710 8,753 Income before income tax expense 56,940 27,461 29,479 Income tax expense (5) 15,173 4,299 10,874 Net income $ 41,767 $ 23,162 $ 18,605 Total revenue (6) $ 154,128 $ 143,221 $ 10,907 Diluted average shares outstanding 19,390,522 19,052,605 337,917 <td valign="bottom" style="background-color:#CFF0FC;padding-left:0pt;padding-Right:0.75pt;padding-Top:0.75pt;padding-Bottom:0pt;width:1