Provident Financial Services Inc: Form 10-Q for the period ended Mar 31, 2024

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, 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 pending merger 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 pending merger transaction may be more expensive to complete than anticipated, including as a result of conditions imposed by regulators, unexpected conditions, 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

The Company received all regulatory approvals for its previously announced acquisition of Lakeland Bancorp, Inc. ("Lakeland"), subject to certain conditions and commitments (referred to as the “Regulatory Conditions”). The Regulatory Conditions include, but are not limited to: prior to consummation of the merger, the Company must complete the issuance of $200 million of Tier 2 qualifying subordinated debt; for three years following consummation of the merger, Provident Bank must maintain regulatory capital ratios at or above 8.50% for Tier 1 Leverage Capital and 11.25% for Total Risk Based Capital; and Provident Bank must maintain its commercial real estate concentrations (as a percent of capital and reserves) at levels at or below those forecasted in the pro forma financial projections that Provident Bank submitted to the FDIC. In connection with the acquisition, Lakeland Bank, a wholly owned subsidiary of Lakeland, will be merged with and into Provident Bank, a wholly owned subsidiary of the Company. As of March 31, 2024, Lakeland had, on a consolidated basis, $11.00 billion in total assets, which included $8.30 billion in total loans and $8.50 billion in total deposits, and operated 67 full-service banking offices in New Jersey. Under the merger agreement, each share of Lakeland common stock will be exchanged for 0.8319 shares, or approximately 55 million shares, of the Company's common stock plus cash in lieu of fractional shares. Provident stockholders will own approximately 58% and Lakeland shareholders will own approximately 42% of the combined company. The combined company is expected to have approximately $25 billion in total assets, $19.2 billion in total loans and $18.6 billion in total deposits.

Merger-related expenses, which is a separate line in non-interest expense on the Consolidated Statements of Income, totaled $2.2 million for the three months ended March 31, 2024.

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 ACL 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 on loans relates to the macroeconomic forecasts used to estimate expected credit losses over the forecast period. As of March 31, 2024, 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. For example, the commercial property price index used in the model has a higher proportion of office exposure relative to that of the Bank. This baseline outlook reflected a worsened economic forecast and related deterioration in the projected commercial property price index used in our CECL model. The Company made qualitative adjustments to the projected commercial real estate property price index, considering the differences in portfolio collateral composition versus the commercial property price index used in our CECL models. The allowance estimation process resulted in a total provision of $200,000 for the three months ended March 31, 2024, and an overall coverage ratio of 98 basis points. Management believes the allowance for credit losses allocated to the commercial real estate non-owner occupied portfolio segment accurately represents the estimated inherent losses, factoring in the qualitative adjustment and other assumptions, including the selection of the baseline forecast within the model. If the Company used the unadjusted baseline outlooks for the commercial property price index over the expected lives of Commercial Real Estate Non-Owner Occupied and Owner-Occupied loan portfolios, the provision would have risen by approximately $6.2 million, leading to an overall coverage ratio of approximately 104 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 March 31, 2024, 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 greater than $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.

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. 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. The model includes both quantitative and qualitative components. 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, and to the extent actual losses are higher than management estimates, additional provision for credit losses on loans could be required and could adversely affect our earnings or financial position 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 volatility.

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 months ended March 31, 2024, the increase in provision was primarily attributable to an increase in specific reserves on impaired credits, partially offset by an improved economic forecast for the current quarter within our CECL model.

COMPARISON OF FINANCIAL CONDITION AS OF MARCH 31, 2024 AND DECEMBER 31, 2023

Total assets as of March 31, 2024 were $14.13 billion, a $79.9 million decrease from December 31, 2023. The decrease in total assets was primarily due to a $33.6 million decrease in total investments and a $31.0 million decrease in total loans.

The Company’s loan portfolio decreased $31.0 million to $10.84 billion as of March 31, 2024, from $10.87 billion as of December 31, 2023. The loan portfolio consists of the following:

(1) Commercial loans consist of owner-occupied real estate and commercial & industrial loans.

During the three months ended March 31, 2024, the loan portfolio had net decreases of $158.6 million in commercial mortgage loans, $12.8 million in residential mortgage loans and $4.0 million in consumer loans, partially offset by net increases of $72.1 million in commercial loans, $58.2 million in construction loans and $13.4 million in multi-family loans. Commercial real estate, multi-family, commercial and construction loans represented 86.7% of the loan portfolio as of March 31, 2024, compared to 86.5% as of December 31, 2023.

The Bank’s lending activities, though concentrated in the communities surrounding its offices, extend predominantly throughout New Jersey, eastern Pennsylvania and Nassau and Queens County, New York. This geographic concentration subjects the Company’s loan portfolio to the general economic conditions within these states. The risks created by this concentration have been considered by management in the determination of the appropriateness of the allowance for credit losses.

We consider our commercial real estate loans to be higher risk categories in our loan portfolio. These loans are particularly sensitive to economic conditions. As of March 31, 2024, our portfolio of commercial real estate loans, including multi-family and construction loans, totaled $6.89 billion, or 63.50% of total gross loans.

The Company believes the CRE loans it originates are appropriately collateralized under its credit standards. Collateral properties include multi-family apartment buildings, warehouse/distribution buildings, shopping centers, office buildings, mixed-use buildings, hotels/motels, senior living, residential and commercial tract developments, and raw land or lots to be developed into single-family homes. The primary source of repayment on the permanent loan portion of these loans is generally expected to come from the cash flow stream of the underlying leases which are dependent on the successful operations of the respective tenants. The primary source of the repayment on the construction portfolio is dependent on the successful completion of the project and the related sale, permanent financing or lease of the real property collateral. As a result, the performance of these loans is generally impacted by fluctuations in collateral values, the ability of the borrower to obtain permanent financing, and, in the case of loans to residential builder/developers, volatility in consumer demand.

The table below summarizes the concentrations of CRE loans on a gross basis, not including any purchase accounting adjustments, based on the collateral securing the loans, as of March 31, 2024 (in thousands):

(1) As of March 31, 2024, Multi-family CRE loans on New York City properties totaled $192.4 million. This portfolio constitutes only 1.8% of total loans and has an average loan size of $2.8 million. Approximately $118.0 million of these loans are collateralized by rent stabilized apartments and all are performing.

The determination of collateral value is critically important when financing real estate. As a result, obtaining current and objectively prepared appraisals is a major part of the underwriting process. The Company engages a variety of professional firms to supply appraisals, market studies and feasibility reports, environmental assessments and project site inspections to complement its internal resources to underwrite and monitor these credit exposures.

However, in periods of economic uncertainty where real estate market conditions may change rapidly, more current appraisals are obtained when warranted by conditions such as a borrower’s deteriorating financial condition, their possible inability to perform on the loan or other indicators of increasing risk of reliance on collateral value as the sole source of repayment of the loan. Annual appraisals are generally obtained for loans graded substandard or worse where real estate is a material portion of the collateral value and/or the income from the real estate or sale of the real estate is the primary source of debt service.

Appraisals are, in substantially all cases, reviewed by a third party to determine the reasonableness of the appraised value. The third-party reviewer will challenge whether or not the data used is appropriate and relevant, form an opinion as to the appropriateness of the appraisal methods and techniques used, and determine if overall the analysis and conclusions of the appraiser can be relied upon. Additionally, the third-party reviewer provides a detailed report of that analysis. Further review may be conducted by credit or lending teams, including the Bank’s commercial workout team as conditions warrant. These additional steps of review are undertaken to confirm that the underlying appraisal and the third-party analysis can be relied upon. If differences arise, management addresses those with the reviewer and determines an appropriate resolution in accordance with its lending policy. Both the appraisal process and the appraisal review process can be less reliable in establishing accurate collateral values during and following periods of economic weakness due to the lack of comparable sales and the limited availability of financing to support an active market of potential purchasers.

The table below summarizes the Company’s commercial real estate portfolio, including multi-family and construction loans as of March 31, 2024, as segregated by the geographic region in which the property is located (dollars in thousands):

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 $135.4 million and $53.8 million, respectively, as of March 31, 2024, compared to $140.5 million and $54.9 million, respectively, as of December 31, 2023. 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 as of March 31, 2024.

The Company had outstanding junior lien mortgages totaling $142.1 million as of March 31, 2024. Of this total, four loans totaling $507,000 were 90 days or more delinquent.

The following table sets forth information regarding the Company’s non-performing assets as of March 31, 2024 and December 31, 2023 (in thousands):

The following table sets forth information regarding the Company’s 60-89 day delinquent loans as of March 31, 2024 and December 31, 2023 (in thousands):

As of March 31, 2024, the Company’s allowance for credit losses related to the loan portfolio was 0.98% of total loans, compared to 0.99% as of December 31, 2023 and 0.91% as of March 31, 2023, respectively. The Company recorded a provision for credit losses on loans of $200,000 for the three months ended March 31, 2024, compared with a provision of $6.0 million for the three months ended March 31, 2023, respectively. For the three months ended March 31, 2024, the Company had net charge-offs of $971,000 compared to net charge-offs of $671,000 for the same period in 2023. The allowance for credit losses decreased $771,000 to $106.4 million as of March 31, 2024 from $107.2 million as of December 31, 2023. The decrease in the provision for credit losses for the quarter was primarily attributable to an improved economic forecast for the current quarter within our CECL model, partially offset by an increase in specific reserves on impaired credits.

Total non-performing loans were $47.6 million, or 0.44% of total loans as of March 31, 2024, compared to $49.6 million, or 0.46% of total loans as of December 31, 2023. The $2.0 million decrease in non-performing loans as of March 31, 2024, compared to the trailing quarter, consisted of a $4.6 million decrease in non-performing commercial loans and a $771,000 decrease in non-performing construction loans, partially offset by a $1.6 million increase in non-performing multi-family loans, a $794,000 increase in non-performing residential mortgage loans, a $787,000 increase in non-performing commercial mortgage loans and a $127,000 increase in non-performing consumer loans.

As of March 31, 2024 and December 31, 2023, the Company held foreclosed assets of $11.3 million and $11.7 million, respectively. During the three months ended March 31, 2024, there were two properties sold with an aggregate carrying value of $327,000. Foreclosed assets as of March 31, 2024 consisted primarily of commercial real estate. Total non-performing assets as of March 31, 2024, decreased $2.4 million to $58.9 million, or 0.42% of total assets, from $61.3 million, or 0.43% of total assets as of December 31, 2023.

Total investment securities were $2.10 billion as of March 31, 2024, a $33.6 million decrease from December 31, 2023. 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 $193.6 million during the three months ended March 31, 2024, to $10.10 billion. The decrease in total deposits was primarily due to a decrease in brokered deposits of $90.0 million and a decrease in municipal deposits of $57.0 million. Total savings and demand deposit accounts decreased $129.7 million to $9.07 billion as of March 31, 2024, while total time deposits decreased $64.0 million to $1.03 billion as of March 31, 2024. The decrease in savings and demand deposits consisted of a $149.1 million decrease in non-interest-bearing demand deposits and a $14.7 million decrease in savings deposits, partially offset by a $28.6 million increase in interest bearing demand deposits and a $5.5 million increase in money market deposits. The decrease in time deposits consisted of a $90.0 million decrease in brokered time deposits, partially offset by a $26.0 million increase in retail time deposits.

Within total deposits, brokered deposits totaled $75.7 million as of March 31, 2024. Our estimated uninsured and uncollateralized deposits as of March 31, 2024 totaled $2.49 billion, or 24.7% of deposits. Our total estimated uninsured deposits, including collateralized deposits as of March 31, 2024 was $5.25 billion. Within time deposits, approximately $96.7 million, or 9.4% was uninsured as of March 31, 2024.

Borrowed funds increased $88.1 million during the three months ended March 31, 2024, to $2.06 billion. The increase in borrowings was largely due to asset funding requirements. Borrowed funds represented 14.6% of total assets as of March 31, 2024, an increase from 13.9% as of December 31, 2023.

Stockholders’ equity increased $4.6 million during the three months ended March 31, 2024, to $1.70 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. For the three months ended March 31, 2024, common stock repurchases totaled 86,325 shares at an average cost of $14.84 per share, all of which were made in connection with withholding to cover income taxes on the vesting of stock-based compensation. As of March 31, 2024, approximately 1.0 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 three months ended March 31, 2024 and 2023, loan repayments totaled $648.8 million and $826.7 million, 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 $1.72 billion and $1.33 billion, respectively as of March 31, 2024. Our estimated uninsured and uncollateralized deposits as of March 31, 2024 totaled $2.49 billion, or 24.7% of deposits. Our total estimated uninsured deposits, including collateralized deposits as of March 31, 2024, was $5.25 billion.

In March 2023, the Bank established a facility under the BTFP with the FRBNY. As of March 31, 2024, the Company had $550.0 million of advances under the Program. We elected to participate in the BTFP program due to significant cost savings compared to other wholesale funding sources. The funding was used to pay off existing wholesale borrowings. The ability to prepay at any time without penalty also enhances our ability to manage our interest rate risk position.

Total deposits decreased $193.6 million for the three months ended March 31, 2024. Deposit activity is affected by changes in interest rates, competitive pricing and product offerings in the marketplace, local economic conditions, customer confidence and other factors such as stock market volatility. Certificate of deposit accounts that are scheduled to mature within one year totaled $881.1 million as of March 31, 2024. Based on its current pricing strategy and customer retention experience, the Bank expects to retain a significant share of these accounts. The Bank manages liquidity on a daily basis and expects to have sufficient cash to meet all of its funding requirements.

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.

As of March 31, 2024, 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%.

(2) For a period of three years following completion of the merger, Provident Bank will be required to maintain a Tier 1 capital to total assets leverage ratio of at least 8.5% and a total capital to risk-based assets ratio of at least 11.25%.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023

General. The Company reported net income of $32.1 million, or $0.43 per basic and diluted share for the three months ended March 31, 2024, compared to net income of $40.5 million, or $0.54 per basic and diluted share, for the three months ended March 31, 2023.

Transaction costs related to our pending merger with Lakeland totaled $2.2 million for the three months ended March 31, 2024, compared with $1.1 million for the respective 2023 period. In addition, prior year earnings for the three months ended March 31, 2023, included a $2.0 million gain recognized from the sale of a foreclosed commercial property.

The following tables sets forth certain information for the three months ended March 31, 2024 and 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.

Net Interest Income. Net interest income decreased $14.7 million to $93.7 million for the three months ended March 31, 2024, from $108.3 million for same period in 2023. The decrease in net interest income 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 and the favorable repricing of adjustable-rate loans.

The net interest margin decreased 61 basis points to 2.87% for the quarter ended March 31, 2024, compared to 3.48% for the quarter ended March 31, 2023. The weighted average yield on interest-earning assets increased 43 basis points to 5.06% for the quarter ended March 31, 2024, compared to 4.63% for the quarter ended March 31, 2023, while the weighted average cost of interest-bearing liabilities increased 126 basis points for the quarter ended March 31, 2024, to 2.80%, compared to 1.54% for the quarter ended March 31, 2023. The average cost of interest-bearing deposits for the quarter ended March 31, 2024, was 2.60%, compared to 1.39% for the same period last year. Average non-interest-bearing demand deposits totaled $2.07 billion for the quarter ended March 31, 2024, compared to $2.55 billion for the quarter ended March 31, 2023. The average cost of total deposits, including non-interest-bearing deposits, was 2.07% for the quarter ended March 31, 2024, compared with 1.05% for the quarter ended March 31, 2023. The average cost of borrowed funds for the quarter ended March 31, 2024, was 3.60%, compared to 2.48% for the same period last year.

Interest income on loans secured by real estate increased $11.5 million to $107.5 million for the three months ended March 31, 2024, from $96.0 million for the three months ended March 31, 2023. Commercial loan interest income increased $7.4 million to $36.1 million for the three months ended March 31, 2024, from $28.7 million for the three months ended March 31, 2023. Consumer loan interest income increased $0.3 million to $4.5 million for the three months ended March 31, 2024, from $4.2 million for the three months ended March 31, 2023. For the three months ended March 31, 2024, the average balance of total loans increased $575.1 million to $10.67 billion, compared to the same period in 2023. The average yield on total loans for the three months ended March 31, 2024, increased 39 basis points to 5.51%, from 5.12% for the same period in 2023.

Interest income on held to maturity debt securities decreased $100,000 to $2.3 million for the three months ended March 31, 2024, compared to the same period last year. Average held to maturity debt securities decreased $26.7 million to $357.2 million for the three months ended March 31, 2024, from $383.9 million for the same period in 2023.

Interest income on available for sale debt securities decreased $380,000 to $10.0 million for the three months ended March 31, 2024, from $10.4 million for the three months ended March 31, 2023. The average balance of available for sale debt securities decreased $134.7 million to $1.67 billion for the three months ended March 31, 2024, compared to the same period in 2023.

Dividend income on FHLBNY stock increased $1.3 million to $2.3 million for the three months ended March 31, 2024, from $1.0 million for the three months ended March 31, 2023. The average balance of FHLBNY stock increased $14.6 million to $73.8 million for the three months ended March 31, 2024, compared to the same period in 2023.

The average yield on total securities increased to 2.87% for the three months ended March 31, 2024, compared with 2.52% for the same period in 2023.

Interest expense on deposit accounts increased $25.0 million to $52.5 million for the three months ended March 31, 2024, compared with $27.5 million for the three months ended March 31, 2023. The average cost of interest-bearing deposits increased to 2.60% for the three months ended March 31, 2024, from 1.39% for the three months ended March 31, 2023. The average balance of interest-bearing core deposits, which consist of total savings and demand deposits, for the three months ended March 31, 2024, decreased $112.8 million to $7.06 billion. Average time deposit account balances increased $205.4 million to $1.07 billion for the three months ended March 31, 2024, from $859.8 million for the three months ended March 31, 2023.

Interest expense on borrowed funds increased $9.9 million to $17.4 million for the three months ended March 31, 2024, from $7.5 million for the three months ended March 31, 2023. The average cost of borrowings increased to 3.60% for the three months ended March 31, 2024, from 2.48% for the three months ended March 31, 2023. Average borrowings increased $716.7 million to $1.94 billion for the three months ended March 31, 2024, from $1.22 billion for the three months ended March 31, 2023.

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 a $200,000 provision for credit losses on loans, compared with a $6.0 million provision for credit losses for the quarter ended March 31, 2023. The decrease in the provision for credit losses was largely a function of the period-over-period improvement in the economic forecast.

Non-Interest Income. Non-interest income totaled $20.8 million for the quarter ended March 31, 2024, a decrease of $1.3 million, compared to the same period in 2023. Other income decreased $2.5 million to $798,000 for the three months ended March 31, 2024, compared to the quarter ended March 31, 2023, primarily due to a $2.0 million gain from the sale of a foreclosed commercial property which was recorded in the prior year, combined with a decrease in gains on sales of SBA loans. Fee income decreased $475,000 to $5.9 million for the three months ended March 31, 2024, 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, insurance agency income increased $691,000 to $4.8 million for the three months ended March 31, 2024, compared to the quarter ended March 31, 2023, largely due to an increase in business activity. Wealth management income increased $573,000 to $7.5 million for the three months ended March 31, 2024, compared to the quarter ended March 31, 2023, mainly due to an increase in the average market value of assets under management during the period, combined with an increase in mutual fund fees. Additionally, BOLI income increased $333,000 to $1.8 million for the three months ended March 31, 2024, compared to the prior year quarter, primarily due a benefit claim recognized in the current quarter, combined with an increase in equity valuations.

Non-Interest Expense. For the three months ended March 31, 2024, non-interest expense totaled $71.3 million, an increase of $1.8 million, compared to the three months ended March 31, 2023. Compensation and benefits expense increased $1.3 million to $40.0 million for three months ended March 31, 2024, compared to $38.7 million for the same period in 2023. The increase was primarily due to an increase in salary expense associated with Company-wide annual merit increases, combined with increases in the accrual for incentive compensation, payroll taxes and employee insurance, partially offset by a decrease in stock-based compensation. Data processing expense increased $1.3 million to $6.8 million for three months ended March 31, 2024, compared to $5.5 million for the same period in 2023. The increase in data processing expense was primarily due to increases in software service, telecommunication and electronic business banking expenses. Merger-related expenses related to our pending combination with Lakeland increased $1.1 million to $2.2 million for the three months ended March 31, 2024, compared to the same period in 2023. Additionally, FDIC insurance expense increased $335,000 to $2.3 million for the three months ended March 31, 2024, compared to the same period in 2023, primarily due to a current quarter FDIC special assessment of $195,000, combined with an increase in the assessment rate. Partially offsetting these increases in non-interest expense, other operating expense decreased $729,000 to $10.3 million for the three months ended March 31, 2024, compared to $11.1 million for the three months ended March 31, 2023, largely due to a decrease in professional fees, partially offset by additional expenses related to foreclosed commercial real estate properties. For the three months ended March 31, 2024, the Company recorded a $506,000 provision benefit for credit losses on off-balance sheet credit exposures, compared to a $739,000 provision charge for the same period in 2023. The $1.2 million decrease in the provision for credit losses on off-balance sheet credit exposures for the current quarter was primarily due to a decrease in loans approved and awaiting closing.

Income Tax Expense. For the three months ended March 31, 2024, the Company's income tax expense was $10.9 million with an effective tax rate of 25.3%, compared with $14.5 million with an effective tax rate of 26.3% for the three months ended March 31, 2023. The decrease in tax expense for the three months ended March 31, 2024, compared with the same period last year was largely the result of a decrease in taxable income and the 2024 sunset of the 2.5% NJ Corporate Business Tax surcharge, while the decrease in the effective tax rate for the three months ended March 31, 2024, compared with the three months ended March 31, 2023, was largely due to the 2024 sunset of the 2.5% NJ Corporate Business Tax surcharge and 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 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 March 31, 2024 (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 March 31, 2024, in the event of a 100 basis point increase in interest rates, whereby rates ramp up evenly over a twelve-month period, net interest income would increase 0.1%, or $512,000. 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 2.8%, or $10.7 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 March 31,

2024 (dollars in thousands):

The preceding table indicates that as of March 31, 2024, in the event of an immediate and sustained 100 basis point increase in interest rates, the present value of equity is projected to increase 1.2%, or $20.5 million. If rates were to decrease 300 basis points, the present value of equity would decrease 17.7%, or $305.3 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 fiscal year ended December 31, 2023, have been supplemented by the Company for the quarter ended March 31, 2024, as follows:

Risk Factors Related to the Pending Merger with Lakeland

The regulatory approvals received for the merger of the Company and Lakeland include conditions and commitments that could in the future have adverse effects on the Company.

The Company and Provident Bank have received approvals from the bank regulatory authorities to consummate the merger with Lakeland, subject to certain Regulatory Conditions. The Regulatory Conditions include, but are not limited to: prior to consummation of the merger, the Company must complete the issuance of $200 million of Tier 2 qualifying subordinated debt; for three years following consummation of the merger, Provident Bank must maintain regulatory capital ratios at or above 8.50% for Tier 1 Leverage Capital and 11.25% for Total Risk Based Capital; and Provident Bank must maintain its commercial real estate concentrations (as a percent of capital and reserves) at levels at or below those forecasted in the pro forma financial projections that Provident Bank submitted to the FDIC. The failure to comply with the Regulatory Conditions following the consummation of the merger could result in supervisory and enforcement actions against the Company and Provident Bank, including the issuance of a cease and desist order or the imposition of civil money penalties, and could constrain the Company’s business operations, which could materially and adversely affect our business, financial condition, results of operations and prospects.

Failure to complete the merger could negatively impact us.

If the merger is not completed for any reason, including failure to comply with the applicable Regulatory Conditions, there may be various adverse consequences for us. If the merger is not completed, we may experience negative reactions from the financial markets and from our customers and employees. We also could be subject to litigation or enforcement actions related to any failure to consummate the merger. If the merger is not completed, we will have to pay certain expenses related to the merger and this offering without realizing the expected benefits of the merger. Consequently, the failure to complete the merger could have a material adverse impact on us.