Provident Financial Services Inc: Form 10-Q for the period ended Sep 30, 2023

Forward-Looking Statements

Certain statements contained herein are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,” "project," "intend," “anticipate,” “continue,” or similar terms or variations on those terms, or the negative of those terms. Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those set forth in Item 1A of the Company's Annual Report on Form 10-K, as supplemented by its Quarterly Reports on Form 10-Q, and those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, the effects of the recent turmoil in the banking industry (including the closing of three financial institutions), changes in accounting policies and practices that may be adopted by the regulatory agencies and the accounting standards setters, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, potential goodwill impairment, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets, the availability of and costs associated with sources of liquidity, the ability to complete, or any delays in completing, the pending merger between the Company and Lakeland; any failure to realize the anticipated benefits of the transaction when expected or at all; certain restrictions during the pendency of the transaction that may impact the Company’s ability to pursue certain business opportunities or strategic transactions; the possibility that the transaction may be more expensive to complete than anticipated, including as a result of unexpected factors or events, diversion of management’s attention from ongoing business operations and opportunities; potential adverse reactions or changes to business or employee relationships, including those resulting from the completion of the merger and integration of the companies; and the impact of a potential shutdown of the federal government.

The Company cautions readers not to place undue reliance on any such forward-looking statements which speak only as of the date they are made. The Company advises readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not assume any duty, and does not undertake, to update any forward-looking statements to reflect events or circumstances after the date of this statement.

Lakeland Bancorp, Inc. Merger Agreement

On September 26, 2022, the Company entered into a definitive merger agreement pursuant to which it will merge (the “merger”) with Lakeland Bancorp, Inc. ("Lakeland"), and Lakeland Bank, a wholly owned subsidiary of Lakeland, will merge with and into Provident Bank, a wholly owned subsidiary of the Company. The merger agreement has been unanimously approved by the boards of both companies and shareholder approval has also been received for both companies. The actual value of the Company’s common stock to be recorded as consideration in the merger will be based on the closing price of Company’s common stock at the time of the merger completion date. Under the merger agreement, each share of Lakeland common stock will be exchanged for 0.8319 shares of the Company's common stock plus cash in lieu of fractional shares.

Upon completion of the transaction, which remains subject to regulatory approvals and other closing conditions, Provident shareholders will own approximately 58% and Lakeland shareholders will own approximately 42% of the combined company. The combined company is expected to have more than $25 billion in total assets, $18 billion in total loans and $20 billion in total deposits.

Critical Accounting Policies

The Company considers certain accounting policies to be critically important to the fair presentation of its financial condition and results of operations. These policies require management to make complex judgments on matters which by their nature have elements of uncertainty. The sensitivity of the Company’s consolidated financial statements to these critical accounting policies, and the assumptions and estimates applied, could have a significant impact on its financial condition and results of operations. These assumptions, estimates and judgments made by management can be influenced by a number of factors, including the general economic environment. The Company has identified the allowance for credit losses on loans as a critical accounting policy.

The allowance for credit losses is a valuation account that reflects management’s evaluation of the current expected credit losses in the loan portfolio. The Company maintains the allowance for credit losses through provisions for credit losses that are charged to income. Charge-offs against the allowance for credit losses are taken on loans where management determines that the collection of loan principal and interest is unlikely. Recoveries made on loans that have been charged-off are credited to the allowance for credit losses.

The calculation of the allowance for credit losses is a critical accounting policy of the Company. Management estimates the allowance balance using relevant available information, from internal and external sources, related to past events, current conditions, and a reasonable and supportable forecast. Historical credit loss experience for both the Company and peers provides the basis for the estimation of expected credit losses, where observed credit losses are converted to probability of default rate (“PDR”) curves through the use of segment-specific loss given default (“LGD”) risk factors that convert default rates to loss severity based on industry-level, observed relationships between the two variables for each segment, primarily due to the nature of the underlying collateral. These risk factors were assessed for reasonableness against the Company’s own loss experience and adjusted in certain cases when the relationship between the Company’s historical default and loss severity deviate from that of the wider industry. The historical PDR curves, together with corresponding economic conditions, establish a quantitative relationship between economic conditions and loan performance through an economic cycle.

Using the historical relationship between economic conditions and loan performance, management’s expectation of future loan performance is incorporated using an externally developed economic forecast. This forecast is applied over a period that management has determined to be reasonable and supportable. Beyond the period over which management can develop or source a reasonable and supportable forecast, the model will revert to long-term average economic conditions using a straight-line, time-based methodology. The Company's current forecast period is six quarters, with a four-quarter reversion period to historical average macroeconomic factors. The Company's economic forecast is approved by the Company's Asset-Liability Committee.

The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics exist. The respective quantitative allowance for each loan segment is measured using an econometric, discounted PDR/LGD modeling methodology in which distinct, segment-specific multi-variate regression models are applied to an external economic forecast. Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and amortized cost basis. Contractual cash flows over the contractual life of the loans are the basis for modeled cash flows, adjusted for modeled defaults and expected prepayments and discounted at the loan-level effective interest rate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies at the reporting date: management has a reasonable expectation that a modification will be executed with an individual borrower; or when an extension or renewal option is included in the original contract and is not unconditionally cancellable by the Company. Management will assess the likelihood of the option being exercised by the borrower and appropriately extend the maturity for modeling purposes.

The Company considers qualitative adjustments to credit loss estimates for information not already captured in the quantitative component of the loss estimation process. Qualitative factors are based on portfolio concentration levels, model imprecision, changes in industry conditions, changes in the Company’s loan review process, changes in the Company’s loan policies and procedures, and economic forecast uncertainty.

One of the most significant judgments involved in estimating the Company’s allowance for credit losses relates to the macroeconomic forecasts used to estimate expected credit losses over the forecast period. As of September 30, 2023, the model incorporated Moody’s baseline economic forecast, as adjusted for qualitative factors, as well as an extensive review of classified loans and loans that were classified as impaired with a specific reserve assigned to those loans. This baseline outlook reflected a worsened economic forecast and related deterioration in the projected commercial property price indices used in our CECL model and resulted in recorded provisions of $11.0 million and $27.4 million for the three and nine months ended September 30, 2023, and a coverage ratio of 101 basis points. The Company applied qualitative adjustments to the projected commercial property price indices to account for differences in portfolio collateral composition versus the commercial real estate index and regional performance differences compared with the national multi-family index used in our CECL model. Had the Company used the unadjusted baseline outlooks for the commercial property and multi-family property price indices over the expected lives of Commercial Real Estate and Multi-family loan portfolios, the provision would have increased by $8.5 million, resulting in a coverage ratio of 109 basis points.

Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Management developed segments for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation. The segments have been combined or sub-segmented as needed to ensure loans of similar risk profiles are appropriately pooled. As of September 30, 2023, the portfolio and class segments for the Company’s loan portfolio were:

• Mortgage Loans – Residential, Commercial Real Estate, Multi-Family and Construction
• Commercial Loans – Commercial Owner Occupied and Commercial Non-Owner Occupied
• Consumer Loans – First Lien Home Equity and Other Consumer

The allowance for credit losses on loans individually evaluated for impairment is based upon loans that have been identified through the Company’s normal loan monitoring process. This process includes the review of delinquent and problem loans at the Company’s Delinquency, Credit, Credit Risk Management and Allowance Committees; or which may be identified through the Company’s loan review process. Generally, the Company only evaluates loans individually for impairment if the loan is non-accrual, non-homogeneous and the balance is at least $1.0 million.

For all classes of loans deemed collateral-dependent, the Company estimates expected credit losses based on the fair value of the collateral less any selling costs. If the loan is not collateral dependent, the allowance for credit losses related to individually assessed loans is based on discounted expected cash flows using the loan’s initial effective interest rate.

For loans acquired that have experienced more-than-insignificant deterioration in credit quality since their origination are considered PCD loans. The Company evaluates acquired loans for deterioration in credit quality based on any of, but not limited to, the following: (1) non-accrual status; (2) modification designation; (3) risk ratings of special mention, substandard or doubtful; (4) watchlist credits; and (5) delinquency status, including loans that are current on acquisition date, but had been previously delinquent. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. Subsequent to the acquisition date, the initial allowance for credit losses on PCD loans will increase or decrease based on future evaluations, with changes recognized in the provision for credit losses.

Management believes the primary risks inherent in the portfolio are a general decline in the economy, a decline in real estate market values, rising unemployment or a protracted period of elevated unemployment, increasing vacancy rates in commercial investment properties and possible increases in interest rates in the absence of economic improvement. Any one or a combination of these events may adversely affect borrowers’ ability to repay the loans, resulting in increased delinquencies, credit losses and higher levels of provisions. Management considers it important to maintain the ratio of the allowance for credit losses to total loans at an acceptable level given current and forecasted economic conditions, interest rates and the composition of the portfolio.

Although management believes that the Company has established and maintained the allowance for credit losses at appropriate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment and economic forecast. Management evaluates its estimates and assumptions on an ongoing basis giving consideration to forecasted economic factors, historical loss experience and other factors. Such estimates and assumptions are adjusted when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods. In addition, various regulatory agencies periodically review the adequacy of the Company’s allowance for credit losses as an integral part of their examination process. Such agencies may require the Company to recognize additions to the allowance or additional write-downs based on their judgments about information available to them at the time of their examination. Although management uses the best information available, the level of the allowance for credit losses remains an estimate that is subject to significant judgment and short-term change.

The CECL approach to calculate the allowance for credit losses on loans is significantly influenced by the composition, characteristics and quality of the Company’s loan portfolio, as well as the prevailing economic conditions and forecast utilized.

Material changes to these and other relevant factors creates greater volatility to the allowance for credit losses, and therefore, greater volatility to the Company’s reported earnings. For the three and nine months ended September 30, 2023, the provision for credit losses on loans totaled $11.0 million and $27.4 million, compared to an $8.4 million and a $5.0 million provision for credit losses for the three and nine months ended September 30, 2022. The increases in provision for both periods was primarily attributable to a worsened economic forecast and related deterioration in the projected commercial property price indices used in our CECL model.

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2023 AND DECEMBER 31, 2022

Total assets at September 30, 2023 were $14.09 billion, a $303.4 million increase from December 31, 2022. The increase in total assets was primarily due to a $418.7 million increase in total loans, partially offset by a $132.0 million decrease in total investments.

The Company’s loan portfolio increased $418.7 million to $10.67 billion at September 30, 2023, from $10.25 billion at December 31, 2022. For the nine months ended September 30, 2023, loan funding, including advances on lines of credit, totaled $2.53 billion, compared with $3.05 billion for the same period in 2022. During the nine months ended September 30, 2023, the loan portfolio had net increases of $276.2 million in multi-family loans, $106.4 million in commercial loans and $94.9 million in commercial mortgage loans, partially offset by net decreases in construction, residential mortgage and consumer loans of $48.0 million, $10.1 million and $2.0 million, respectively. Commercial loans, consisting of commercial real estate, multi-family, commercial and construction loans, represented 86.2% of the loan portfolio at September 30, 2023, compared to 85.6% at December 31, 2022.

The Company participates in loans originated by other banks, including participations designated as Shared National Credits (“SNCs”). The Company’s gross commitments and outstanding balances as a participant in SNCs were $172.7 million and $67.0 million, respectively, at September 30, 2023, compared to $203.9 million and $87.3 million, respectively, at December 31, 2022. One SNC relationship, with an outstanding balance of $7.3 million (which represents approximately a 6% share of the total facility commitment) was 90 days or more delinquent at September 30, 2023.

The Company had outstanding junior lien mortgages totaling $140.1 million at September 30, 2023. Of this total, two loans totaling $237,900 were 90 days or more delinquent with an allowance for credit losses of $4,633.

The following table sets forth information regarding the Company’s non-performing assets as of September 30, 2023 and December 31, 2022 (in thousands):

The following table sets forth information regarding the Company’s 60-89 day delinquent loans as of September 30, 2023 and December 31, 2022 (in thousands):

At September 30, 2023, the Company’s allowance for credit losses related to the loan portfolio was 1.01% of total loans, compared to 0.88% at December 31, 2022 and September 30, 2022, respectively. The Company recorded a provision for credit losses on loans of $11.0 million and $27.4 million for the three and nine months ended September 30, 2023, compared with a provision of $8.4 million and $5.0 million for the three and nine months ended September 30, 2022, respectively. For the three and nine months ended September 30, 2023, the Company had net charge-offs of $5.5 million and $7.3 million, respectively, compared to net recoveries of $1.2 million and net recoveries of $2.9 million, respectively, for the same periods in 2022. The allowance for credit losses increased $19.5 million to $107.6 million at September 30, 2023 from $88.0 million at December 31, 2022. The increases in provision for both periods was primarily attributable to a worsened economic forecast and related deterioration in the projected commercial property price indices used in our CECL model.

Total non-performing loans were $39.5 million, or 0.37% of total loans at September 30, 2023, compared to $58.5 million, or 0.57% of total loans at December 31, 2022. The $19.0 million decrease in non-performing loans consisted of a $16.5 million decrease in non-performing commercial mortgage loans, a $2.3 million decrease in non-performing commercial loans, a $599,000 decrease in non-performing residential mortgage loans and a $243,000 decrease in non-performing consumer loans, partially offset by a $693,000 increase in non-performing multi-family loans.

At September 30, 2023 and December 31, 2022, the Company held foreclosed assets of $16.5 million and $2.1 million, respectively. During the nine months ended September 30, 2023, there were four additions to foreclosed assets with an aggregate carrying value of $15.1 million, and three properties sold with an aggregate carrying value of $768,000. Foreclosed assets at September 30, 2023 consisted primarily of commercial real estate. Total non-performing assets at September 30, 2023 decreased $4.6 million to $56.0 million, or 0.40% of total assets, from $60.6 million, or 0.44% of total assets at December 31, 2022.

Total investment securities were $2.13 billion at September 30, 2023, a $132.0 million decrease from December 31, 2022. This decrease was primarily due to repayments of mortgage-backed securities, an increase in unrealized losses on available for sale debt securities and maturities and calls of certain municipal and agency bonds, partially offset by purchases of mortgage-backed and municipal securities.

Total deposits decreased $421.6 million during the nine months ended September 30, 2023, to $10.14 billion. Total savings and demand deposit accounts decreased $738.3 million to $9.07 billion at September 30, 2023, while total time deposits increased $316.7 million to $1.07 billion at September 30, 2023. The decrease in savings and demand deposits was largely attributable to a $456.2 million decrease in non-interest bearing demand deposits, a $324.7 million decrease in money market deposits and a $238.2 million decrease in savings deposits, partially offset by a $280.8 million increase in interest bearing demand deposits. During the nine months ended September 30, 2023, deposit balances from traditional non-interest and interest bearing demand deposits transitioned into our insured cash sweep ("ICS") product, as a method to increase the level of customers' deposit insurance in light of recent deposit turmoil in the banking industry. The Bank's ICS deposits increased $441.8 million to $500.7 million at September 30, 2023, from $58.9 million at December 31, 2022. The increase in time deposits consisted of a $322.4 million increase in retail time deposits, partially offset by a $5.7 million decrease in brokered time deposits. The increase in time deposits was largely attributable to balances from lower-costing deposits transitioning into higher-costing certificates of deposits.

Borrowed funds increased $684.9 million during the nine months ended September 30, 2023, to $2.02 billion. The increase in borrowings was largely due to asset funding requirements. Borrowed funds represented 14.4% of total assets at September 30, 2023, an increase from 9.7% at December 31, 2022.

Stockholders’ equity increased $25.3 million during the nine months ended September 30, 2023, to $1.62 billion, primarily due to net income earned for the period, partially offset by an increase in unrealized losses on available for sale debt securities and cash dividends paid to stockholders. During the three months ended September 30, 2023, the Company did not repurchase shares under its stock repurchase program. During the nine months ended September 30, 2023, common stock repurchases totaled 71,357 shares at an average cost of $23.32 per share, all of which were made in connection with withholding to cover income taxes on the vesting of stock-based compensation. At September 30, 2023, approximately 1.1 million shares remained eligible for repurchase under the current stock repurchase authorization.

Liquidity and Capital Resources. Liquidity refers to the Company’s ability to generate adequate amounts of cash to meet financial obligations to its depositors, to fund loans and securities purchases and operating expenses. Sources of funds include scheduled amortization of loans, loan prepayments, scheduled maturities of unpledged investments, cash flows from securities and the ability to borrow funds from the FHLBNY and approved broker-dealers.

Cash flows from loan payments and maturing investment securities are fairly predictable sources of funds. Changes in interest rates, local economic conditions and the competitive marketplace can influence loan prepayments, prepayments on mortgage-backed securities and deposit flows. For the nine months ended September 30, 2023 and 2022, loan repayments totaled $2.09 billion and $2.34 billion, respectively.

As deposits have declined, the Company has continued to monitor and focus on depositor behavior and borrowing capacity with the FHLBNY and FRBNY, with current borrowing capacity of $1.14 billion and $1.69 billion, respectively at September 30, 2023. Our estimated uninsured and uncollateralized deposits at September 30, 2023 totaled $2.49 billion, representing 25% of our total deposits. At September 30, 2023, Provident Bank had on balance sheet liquidity and borrowing capacity totaling $3.59 billion, representing 144% of estimated uninsured and uncollateralized deposits.

The Bank established the Bank Term Funding Program with the Federal Reserve Bank of New York in March 2023 and pledged approximately $521 million in unencumbered security collateral to the facility improving its access to immediate funding. Advances under the Program can be requested until March 11, 2024. As of September 30, 2023, the Company had not taken any advances under the Program, but has this option available as a short term liquidity source.

During the nine months ended September 30, 2023, deposit balances from traditional non-interest and interest bearing demand deposits transitioned into our ICS product, as a method to increase the level of customers' deposit insurance in light of recent banking turmoil. As of September 30, 2023, our ICS deposits totaled $500.7 million, compared to $58.9 million at December 31, 2022.

The Federal Deposit Insurance Corporation ("FDIC") and the other federal bank regulatory agencies issued a final rule that revised the leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act, that were effective January 1, 2015. Among other things, the rule established a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), adopted a uniform minimum leverage capital ratio at 4%, increased the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigned a higher risk weight (150%) to exposures that are more than 90 days past due or are on non-accrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The rule also required unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital unless a one-time opt-out was exercised. The Company exercised the option to exclude unrealized gains and losses from the calculation of regulatory capital. Additional constraints were also imposed on the inclusion in regulatory capital of mortgage-servicing assets, deferred tax assets and minority interests. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer,” of 2.5% in addition to the amount necessary to meet its minimum risk-based capital requirements.

In the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule providing banking institutions that adopted CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with its adoption of CECL on January 1, 2020, the Company elected to utilize the five-year CECL transition.

At September 30, 2023, the Bank and the Company exceeded all current minimum regulatory capital requirements as follows:

(Dollars in thousands)

(1) Under the FDIC's prompt corrective action provisions, the Bank is considered well capitalized if it has: a leverage (Tier 1) capital ratio of at least 5.00%; a common equity Tier 1 risk-based capital ratio of 6.50%; a Tier 1 risk-based capital ratio of at least 8.00%; and a total risk-based capital ratio of at least 10.00%.

COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

General. The Company reported net income of $28.5 million, or $0.38 per basic and diluted share for the three months ended September 30, 2023, compared to net income of $43.4 million, or $0.58 per basic and diluted share, for the three months ended September 30, 2022. For the nine months ended September 30, 2023, the Company reported net income of $101.1 million, or $1.35 per basic share and diluted share, compared to net income of $126.6 million, or $1.69 per basic and diluted share, for the nine months ended September 30, 2022.

Compared with the prior year periods, net income for the three months ended September 30, 2023 was negatively impacted by decrease in net interest income attributable to increased funding costs and resulting net interest spread compression. Net income for the three nine months ended September 30, 2023 was further impacted by increased provisions for credit losses due to a worsened economic forecast. Transaction costs related to our pending merger with Lakeland Bancorp, Inc. (“Lakeland”) totaled $2.3 million and $5.3 million for the three and nine months ended September 30, 2023, respectively, compared with transaction costs totaling $2.9 million for the respective 2022 periods. In addition, prior year earnings for the three and nine months ended September 30, 2022, included an $8.6 million gain on the sale of a foreclosed property.

The following tables sets forth certain information for the three and nine months ended September 30, 2023. For the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities is expressed both in dollars and rates. No tax equivalent adjustments were made. Average balances are daily averages.

(1) Average outstanding balance amounts shown are amortized cost, net of allowance for credit losses.

(2) Average outstanding balances are net of the allowance for loan losses, deferred loan fees and expenses, loan premiums and discounts and include non-accrual loans.

(3) Annualized net interest income divided by average interest-earning assets.

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(1) Average outstanding balance amounts shown are amortized cost, net of allowance for credit losses.

(2) Average outstanding balances are net of the allowance for loan losses, deferred loan fees and expenses, loan premiums and discounts and include non-accrual loans.

(3) Annualized net interest income divided by average interest-earning assets.

53

Net Interest Income. Net interest income decreased $13.3 million to $96.2 million for the three months ended September 30, 2023, from $109.5 million for same period in 2022. For the nine months ended September 30, 2023, total net interest income increased $175,000 to $303.7 million, from $303.5 million for the same period in 2022. The decrease in net interest income for the comparative quarters was primarily due to a decrease in lower-costing deposits and an increase in borrowings, combined with unfavorable repricing of both deposits and borrowings, partially offset by originations of new loans at higher market rates and the favorable repricing of adjustable-rate loans. The increase in net interest income for the nine months ended September 30, 2023 was primarily driven by the favorable repricing of adjustable rate loans, higher market rates on new loan originations and the originations of higher-yielding loans, partially offset by the unfavorable repricing of both deposits and borrowings, a decrease in lower-costing deposits and an increase in borrowings. Additionally, fees related to the forgiveness of PPP loans, which are recognized in interest income, were approximately $77,000 for the nine months ended September 30, 2023, compared to $1.4 million for the nine months ended September 30, 2022.

The net interest margin decreased 55 basis points to 2.96% for the quarter ended September 30, 2023, compared to 3.51% for the quarter ended September 30, 2022. The weighted average yield on interest-earning assets increased 99 basis points to 4.89% for the quarter ended September 30, 2023, compared to 3.90% for the quarter ended September 30, 2022, while the weighted average cost of interest-bearing liabilities increased 196 basis points for the quarter ended September 30, 2023, to 2.50%, compared to 0.54% for the quarter ended September 30, 2022. The average cost of interest-bearing deposits for the quarter ended September 30, 2023, was 2.22%, compared to 0.47% for the same period last year. Average non-interest-bearing demand deposits totaled $2.23 billion for the quarter ended September 30, 2023, compared to $2.75 billion for the quarter ended September 30, 2022. The average cost of total deposits, including non-interest-bearing deposits, was 1.74% for the quarter ended September 30, 2023, compared with 0.35% for the quarter ended September 30, 2022. The average cost of borrowed funds for the quarter ended September 30, 2023, was 3.74%, compared to 1.11% for the same period last year.

For the nine months ended September 30, 2023, the net interest margin decreased five basis points to 3.19%, compared to 3.24% for the nine months ended September 30, 2022. The weighted average yield on interest-earning assets increased 125 basis points to 4.76% for the nine months ended September 30, 2023, compared to 3.51% for the nine months ended September 30, 2022, while the weighted average cost of interest-bearing liabilities increased 169 basis points to 2.07% for the nine months ended September 30, 2023, compared to 0.38% for the same period last year. The average cost of interest-bearing deposits increased 149 basis points to 1.82% for the nine months ended September 30, 2023, compared to 0.33% for the same period last year. Average non-interest-bearing demand deposits totaled $2.38 billion for the nine months ended September 30, 2023, compared with $2.77 billion for the nine months ended September 30, 2022. The average cost of total deposits, including non-interest-bearing deposits, was 1.40% for the nine months ended September 30, 2023, compared with 0.25% for the nine months ended September 30, 2022. The average cost of borrowings for the nine months ended September 30, 2023, was 3.29%, compared to 0.97% for the same period last year.

Interest income on loans secured by real estate increased $24.3 million to $104.5 million for the three months ended September 30, 2023, from $80.3 million for the three months ended September 30, 2022. Commercial loan interest income increased $8.6 million to $33.8 million for the three months ended September 30, 2023, from $25.2 million for the three months ended September 30, 2022. Consumer loan interest income increased $1.0 million to $4.7 million for the three months ended September 30, 2023, from $3.8 million for the three months ended September 30, 2022. For the three months ended September 30, 2023, the average balance of total loans increased $556.0 million to $10.47 billion, compared to the same period in 2022. The average yield on total loans for the three months ended September 30, 2023, increased 99 basis points to 5.37%, from 4.38% for the same period in 2022.

Interest income on loans secured by real estate increased $86.6 million to $299.8 million for the nine months ended September 30, 2023, from $213.2 million for the nine months ended September 30, 2022. Commercial loan interest income increased $23.5 million to $93.9 million for the nine months ended September 30, 2023, from $70.4 million for the nine months ended September 30, 2022. Consumer loan interest income increased $3.2 million to $13.4 million for the nine months ended September 30, 2023, from $10.3 million for the nine months ended September 30, 2022. For the nine months ended September 30, 2023, the average balance of total loans increased $574.2 million to $10.27 billion, compared with $9.69 billion for the same period in 2022. The average yield on total loans for the nine months ended September 30, 2023, increased 124 basis points to 5.25%, from 4.01% for the same period in 2022.

Interest income on held to maturity debt securities decreased $82,000 to $2.3 million for the three months ended September 30, 2023, compared to the same period last year. Average held to maturity debt securities decreased $25.7 million to $373.7 million for the three months ended September 30, 2023, from $399.4 million for the same period last year. Interest income on held to maturity debt securities decreased $442,000 to $7.1 million for the nine months ended September 30, 2023, compared to the same period in 2022. Average held to maturity debt securities decreased $34.0 million to $379.1 million for the nine months ended September 30, 2023, from $413.1 million for the same period last year.

Interest income on available for sale debt securities increased $1.0 million to $10.1 million for the three months ended September 30, 2023, from $9.1 million for the three months ended September 30, 2022. The average balance of available for sale debt securities decreased $223.9 million to $1.72 billion for the three months ended September 30, 2023, compared to the same period in 2022. Interest income on available for sale debt securities increased $6.0 million to $30.8 million for the nine months ended September 30, 2023, from $24.8 million for the same period last year. The average balance of available for sale debt securities decreased $250.8 million to $1.78 billion for the nine months ended September 30, 2023.

Interest income on FHLBNY stock increased $1.3 million to $1.8 million for the three months ended September 30, 2023, from $445,000 for the three months ended September 30, 2022. The average balance of FHLBNY stock increased $42.0 million to $91.3 million for the three months ended September 30, 2023, compared to the same period in 2022. Interest income on FHLBNY stock increased $8.8 million to $34.7 million for the nine months ended September 30, 2023, from $26.0 million for the same period last year. The average balance of FHLBNY stock increased $40.3 million to $77.6 million for the nine months ended September 30, 2023.

The average yield on total securities increased to 2.67% for the three months ended September 30, 2023, compared with 2.36% for the same period in 2022. For the nine months ended September 30, 2023, the average yield on total securities increased to 2.57%, compared with 1.72% for the same period in 2022.

Interest expense on deposit accounts increased $35.4 million to $44.9 million for the three months ended September 30, 2023, compared with $9.6 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023, interest expense on deposit accounts increased $88.6 million to $108.9 million, from $20.3 million for the same period last year. The average cost of interest-bearing deposits increased to 2.22% and 1.82% for the three and nine months ended September 30, 2023, respectively, from 0.47% and 0.33% for the three and nine months ended September 30, 2022, respectively. The average balance of interest-bearing core deposits, which consist of total savings and demand deposits, for the three months ended September 30, 2023, decreased $440.6 million to $6.98 billion. For the nine months ended September 30, 2023, average interest-bearing core deposits decreased $597.3 million, to $7.03 billion, from $7.62 billion for the same period in 2022. Average time deposit account balances increased $383.2 million to $1.05 billion for the three months ended September 30, 2023, from $669.6 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023, average time deposit account balances increased $279.2 million to $961.0 million, from $681.8 million for the same period in 2022.

Interest expense on borrowed funds increased $14.2 million to $16.8 million for the three months ended September 30, 2023, from $2.5 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023, interest expense on borrowed funds increased $33.5 million to $38.3 million, from $4.8 million for the nine months ended September 30, 2022. The average cost of borrowings increased to 3.74% for the three months ended September 30, 2023, from 1.11% for the three months ended September 30, 2022. The average cost of borrowings increased to 3.29% for the nine months ended September 30, 2023, from 0.97% for the same period last year. Average borrowings increased $0.87 billion to $1.78 billion for the three months ended September 30, 2023, from $908.8 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023, average borrowings increased $893.3 million to $1.56 billion, compared to $663.4 million for the nine months ended September 30, 2022.

Provision for Credit Losses. Provisions for credit losses are charged to operations in order to maintain the allowance for credit losses at a level management considers necessary to absorb projected credit losses that may arise over the expected term of each loan in the portfolio. In determining the level of the allowance for credit losses, management estimates the allowance balance using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable economic forecasts. The amount of the allowance is based on estimates, and the ultimate losses may vary from such estimates as more information becomes available or later events change. Management assesses the adequacy of the allowance for credit losses on a quarterly basis and makes provisions for credit losses, if necessary, in order to maintain the valuation of the allowance.

The Company recorded an $11.0 million and $27.4 million provision for credit losses on loans for the three and nine months ended September 30, 2023, respectively, compared with a provision of $8.4 million and a negative provision of $5.0 million for the three and nine months ended September 30, 2022, respectively. The increase in the provision for credit losses for the three and nine months ended September 30, 2023 was largely a function of a worsened economic forecast and related deterioration in the projected commercial property price indices used in our CECL model.

Non-Interest Income. Non-interest income totaled $19.3 million for the quarter ended September 30, 2023, a decrease of $9.1 million, compared to the same period in 2022. Other income decreased $9.2 million to $1.1 million for the three months ended September 30, 2023, compared to the quarter ended September 30, 2022, primarily due to an $8.6 million gain realized in the prior year on the sale of a foreclosed commercial office property, combined with a decrease in the gains on sales of SBA loans. Fee income decreased $1.1 million to $6.1 million for the three months ended September 30, 2023, compared to the prior year quarter, primarily due to decreases in commercial loan prepayment fees and deposit fee income. Partially offsetting these decreases in non-interest income, BOLI income increased $583,000 to $1.8 million three months ended September 30, 2023, compared to the prior year quarter, primarily due to an increase in benefit claims recognized. Additionally, insurance agency income increased $359,000 to $3.2 million for the three months ended September 30, 2023, compared to the quarter ended September 30, 2022, largely due to strong retention revenue and new business activity.

For the nine months ended September 30, 2023, non-interest income totaled $60.9 million, a decrease of $8.7 million, compared to the same period in 2022. Other income decreased $7.8 million to $5.7 million for the nine months ended September 30, 2023, compared to $13.5 million for the same period in 2022, primarily due to an $8.6 million gain realized in the prior year on the sale of a foreclosed commercial office property, a decrease in net fees on loan-level interest rate swap transactions and a decrease in the gains on sales of SBA loans, partially offset by a $2.0 million gain related to the resolution of certain post-closing conditions following the September 2022 sale of a foreclosed commercial property. Fee income decreased $3.2 million to $18.3 million for the nine months ended September 30, 2023, compared to the same period in 2022, primarily due to a decrease in commercial loan prepayment fees, while wealth management income decreased $448,000 to $20.8 million for the nine months ended September 30, 2023, compared to the same period in 2022, primarily due to a decrease in the market value of assets under management. Partially offsetting these decreases to non-interest income, insurance agency income increased $2.0 million to $11.2 million for the nine months ended September 30, 2023, compared to $9.1 million for the same period in 2022, largely due to increases in contingent commissions, retention revenue and new business activity. Additionally, BOLI income increased $860,000 to $4.8 million for the nine months ended September 30, 2023, compared to the same period in 2022, primarily due to greater equity valuations.

Non-Interest Expense. For the three months ended September 30, 2023, non-interest expense totaled $67.2 million, a decrease of $2.3 million, compared to the three months ended September 30, 2022. Compensation and benefits expense decreased $2.4 million to $35.7 million for three months ended September 30, 2023, compared to $38.1 million for the same period in 2022. The decrease was principally due to decreases in the accrual for incentive compensation, employee medical expense and stock-based compensation, partially offset by an increase in salary expense. Additionally, merger-related expenses related to our pending merger with Lakeland decreased $597,000 to $2.3 million for the three months ended September 30, 2023, compared to the same period in 2022. Partially offsetting these decreases in non-interest expense, FDIC insurance expense increased $228,000 to $1.6 million for the three months ended September 30, 2023, compared to the same period in 2022, primarily due to an increase in the assessment rate.

Non-interest expense totaled $201.1 million for the nine months ended September 30, 2023, an increase of $5.9 million, compared to $195.2 million for the nine months ended September 30, 2022. The Company recorded a $1.6 million provision for credit losses for off-balance sheet credit exposures for the nine months ended September 30, 2023, compared to a $1.8 million provision benefit for the same period in 2022. The $3.4 million increase in the provision for credit losses for off-balance sheet credit exposures was primarily the result of the period-over-period relative change in line of credit utilization and an increase in projected loss factors as a result of a worsened economic forecast. Other operating expense increased $3.2 million to $31.8 million for the nine months ended September 30, 2023, compared to $28.5 million for the nine months ended September 30, 2022, largely due to increases in professional fees, combined with an increase in debit card expense. Merger-related expenses increased $2.4 million to $5.3 million for the nine months ended September 30, 2023, compared to $2.9 million for the nine months ended September 30, 2022. FDIC insurance expense increased $1.7 million to $5.7 million for the nine months ended September 30, 2023, compared to the same period in 2022, primarily due to an increase in the assessment rate. Partially offsetting these increases, compensation and benefits expense decreased $2.9 million to $109.7 million for the nine months ended September 30, 2023, compared to $112.6 million for the nine months ended September 30, 2022, primarily due to decreases in the accrual for incentive compensation, employee medical expenses and stock-based compensation, partially offset by an increase in salary expense. Additionally, net occupancy expense decreased $1.8 million to $24.5 million for the nine months ended September 30, 2023, compared to the same period in 2022, mainly due to decreases in maintenance and depreciation expenses.

Income Tax Expense. For the three months ended September 30, 2023, the Company's income tax expense was $8.8 million with an effective tax rate of 23.7%, compared with $16.7 million with an effective tax rate of 27.7% for the three months ended September 30, 2022. The decrease in tax expense for the three months ended September 30, 2023, compared with the same period last year was largely the result of a decrease in taxable income, while the decrease in the effective tax rate for the three months ended September 30, 2023, compared with the three months ended September 30, 2022, was largely due to a decrease in the proportion of income derived from taxable sources.

For the nine months ended September 30, 2023, the Company's income tax expense was $34.9 million with an effective tax rate of 25.7%, compared with $46.2 million with an effective tax rate of 26.7% for the nine months ended September 30, 2022. The decrease in tax expense for the nine months ended September 30, 2023, compared with the same period last year was largely the result of a decrease in taxable income, while the decrease in the effective tax rate for the nine months ended September 30, 2023, compared with the prior year period was largely due to a decrease in the proportion of income derived from taxable sources.

Qualitative Analysis. Interest rate risk is the exposure of a bank’s current and future earnings and capital arising from adverse movements in interest rates. The guidelines of the Company’s interest rate risk policy seek to limit the exposure to changes in interest rates that affect the underlying economic value of assets and liabilities, earnings and capital. To minimize interest rate risk, the Company generally sells all 20- and 30-year fixed-rate residential mortgage loans at origination. The Company retains residential fixed rate mortgages with terms of 15 years or less and biweekly payment residential mortgages with a term of 30 years or less. Commercial real estate loans generally have interest rates that reset in five years, and other commercial loans such as construction loans and commercial lines of credit reset with changes in the Prime rate, the Federal Funds rate, LIBOR or SOFR. Investment securities purchases generally have maturities of five years or less, and mortgage-backed securities have weighted average lives between three and five years.

The Asset/Liability Committee meets at least monthly, or as needed, to review the impact of interest rate changes on net interest income, net interest margin, net income and the economic value of equity. The Asset/Liability Committee reviews a variety of strategies that project changes in asset or liability mix and the impact of those changes on projected net interest income and net income.

The Company’s strategy for liabilities has been to maintain a stable core-funding base by focusing on core deposit account acquisition and increasing products and services per household. The Company’s ability to retain maturing time deposit accounts is the result of its strategy to remain competitively priced within its marketplace. The Company’s pricing strategy may vary depending upon current funding needs and the ability of the Company to fund operations through alternative sources, primarily by accessing short-term lines of credit with the FHLBNY during periods of pricing dislocation.

Quantitative Analysis. Current and future sensitivity to changes in interest rates are measured through the use of balance sheet and income simulation models. The analysis captures changes in net interest income using flat rates as a base, a most likely rate forecast and rising and declining interest rate forecasts. Changes in net interest income and net income for the forecast period, generally twelve to twenty-four months, are measured and compared to policy limits for acceptable change. The Company periodically reviews historical deposit re-pricing activity and makes modifications to certain assumptions used in its income simulation model regarding the interest rate sensitivity of deposits without maturity dates. These modifications are made to more closely reflect the most likely results under the various interest rate change scenarios. Since it is inherently difficult to predict the sensitivity of interest-bearing deposits to changes in interest rates, the changes in net interest income due to changes in interest rates cannot be precisely predicted. There are a variety of reasons that may cause actual results to vary considerably from the predictions presented below which include, but are not limited to, the timing, magnitude, and frequency of changes in interest rates, interest rate spreads, prepayments, and actions taken in response to such changes.

Specific assumptions used in the simulation model include:

• Parallel yield curve shifts for market rates;
• Current asset and liability spreads to market interest rates are fixed;
• Traditional savings and interest-bearing demand accounts move at 10% of the rate ramp in either direction;
• Retail Money Market and Business Money Market accounts move at 25% and 75% of the rate ramp in either direction respectively, subject to certain interest rate floors; and
• Higher-balance demand deposit tiers and promotional demand accounts move at 50% to 75% of the rate ramp in either direction, subject to certain interest rate floors.

The following table sets forth the results of a twelve-month net interest income projection model as of September 30, 2023 (dollars in thousands):

The interest rate risk position of the Company remains slightly asset-sensitive. As a result, the preceding table indicates that, as of September 30, 2023, in the event of a 200 basis point increase in interest rates, whereby rates ramp up evenly over a twelve-month period, net interest income would increase 0.6%, or $2.3 million. In the event of a 300 basis point decrease in interest rates, whereby rates ramp downward evenly over a twelve-month period, net interest income would decrease 1.4%, or $5.6 million over the same period. In this downward rate scenario, rates on deposits have a repricing floor of zero.

Another measure of interest rate sensitivity is to model changes in economic value of equity through the use of immediate and sustained interest rate shocks. The following table illustrates the result of the economic value of equity model as of September 30, 2023 (dollars in thousands):

The preceding table indicates that as of September 30, 2023, in the event of an immediate and sustained 200 basis point increase in interest rates, the present value of equity is projected to increase 1.3%, or $23.8 million. If rates were to decrease 300 basis points, the present value of equity would decrease 6.9%, or $125.4 million.

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes in net interest income requires the use of certain assumptions regarding prepayment and deposit decay rates, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. While management believes such assumptions are reasonable, there can be no assurance that assumed prepayment rates and decay rates will approximate actual future loan prepayment and deposit withdrawal activity. Moreover, the net interest income table presented assumes that the composition of interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the net interest income table provides an indication of the Company’s interest rate risk exposure at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on the Company’s net interest income and will differ from actual results.

Under the supervision and with the participation of management, including the Principal Executive Officer and the Principal Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) were evaluated at the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and the Principal Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective.

The risk factors that were previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, were supplemented by the Company in its Form 10-Q for the quarter ended March 31, 2023.