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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 theU.S. Government , 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, 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; and potential adverse reactions or changes to business or employee relationships, including those resulting from the completion of the merger and integration of the companies. In addition, the effects of the COVID-19 pandemic continue to have an uncertain impact on the Company, its customers and the communities it serves. Given its ongoing and dynamic nature, including potential variants, it is difficult to predict the continuing impact of the pandemic on the Company's business, financial condition or results of operations. The extent of such impact will depend on future developments, which remain highly uncertain, including when the pandemic will be controlled and abated, and the extent to which the economy can remain open. 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. 44 --------------------------------------------------------------------------------
Lakeland Bancorp, Inc. Merger Agreement
OnSeptember 26, 2022 , the Company entered into a definitive merger agreement pursuant to which it will merge (the "merger") with Lakeland Bancorp, Inc. ("Lakeland"), andLakeland Bank , a wholly owned subsidiary of Lakeland, will merge with and intoProvident Bank , a wholly owned subsidiary of the Company. The merger agreement has been unanimously approved by the boards of directors of 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. The merger is expected to close in the second quarter of 2023, subject to satisfaction of customary closing conditions, including receipt of required regulatory approvals and approval by the shareholders of both companies.
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 following as critical accounting policies:
•Adequacy of the allowance for credit losses; and
•Valuation of deferred tax assets
OnJanuary 1, 2020 , the Company adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments," which replaced the incurred loss methodology with the current expected credit loss ("CECL") methodology. 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, or credited 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 deviates 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 troubled debt restructuring ("TDR") will be executed with an individual borrower; or when an extension or renewal option is included in the original contract and is not 45 --------------------------------------------------------------------------------
unconditionally cancellable by the Company. Management will assess the
likelihood of an option being exercised by any given borrower and appropriately
extend the maturity of the portfolio 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.
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 ofSeptember 30, 2022 , 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 , or if the loan was modified as a TDR. 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. A loan for which the terms have been modified resulting in a concession by the Company, and for which the borrower is experiencing financial difficulties is considered to be a TDR. The allowance for credit losses on a TDR is measured using the same method as all other impaired loans, except that the original interest rate is used to discount the expected cash flows, not the rate specified within the restructuring. For loans acquired that have experienced more-than-insignificant deterioration in credit quality since their origination are considered Purchased Credit Deteriorated ("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) troubled debt restructured 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. As the impact of COVID-19 continues, the effectiveness of medical advances, government programs and the resulting impact on consumer behavior and employment conditions will have a material bearing on future credit conditions. 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. In addition to the ongoing impact of COVID-19, illiquid credit markets, volatile securities markets, and declines in the housing and commercial real estate markets and the economy in general may increase the uncertainty inherent in such estimates and assumptions. 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 46 -------------------------------------------------------------------------------- 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. Management considers different economic scenarios that may impact the allowance for credit losses on loans. Among other balance sheet and income statement changes, these scenarios could result in a significant increase to the allowance for credit losses on loans. These scenarios include both the quantitative and qualitative components of the model and demonstrate how sensitive the allowance can be to key assumptions underlying the overall calculation. 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. See Note 4 to the Consolidated Financial Statements for more information on the allowance for credit losses on loans. The determination of whether deferred tax assets will be realizable is predicated on the reversal of existing deferred tax liabilities and estimates of future taxable income. Such estimates are subject to management's judgment. A valuation allowance is established when management is unable to conclude that it is more likely than not that it will realize deferred tax assets based on the nature and timing of these items. The Company did not require a valuation allowance atSeptember 30, 2022 orDecember 31, 2021 .
COMPARISON OF FINANCIAL CONDITION AT
Total assets atSeptember 30, 2022 were$13.60 billion , a$177.4 million decrease fromDecember 31, 2021 . The decrease in total assets was primarily due to a$527.6 million decrease in cash and cash equivalents and a$250.5 million decrease in total investments, partially offset by a$464.9 million increase in total loans. The Company's loan portfolio increased$464.9 million to$10.05 billion atSeptember 30, 2022 , from$9.58 billion atDecember 31, 2021 . For the nine months endedSeptember 30, 2022 , loan funding, including advances on lines of credit, totaled$3.05 billion , compared with$2.54 billion for the same period in 2021. Total PPP loans outstanding, which are included in total commercial loans, decreased$89.3 million to$5.6 million atSeptember 30, 2022 , from$94.9 million atDecember 31, 2021 . Excluding the decrease in PPP loans, during the nine months endedSeptember 30, 2022 , the Company experienced net increases of$410.2 million in commercial mortgage loans,$114.0 million in multi-family loans and$91.0 million in commercial loans, partially offset by net decreases in residential mortgage, construction and consumer loans of$33.3 million $16.4 million and$10.9 million , respectively. Commercial loans, consisting of commercial real estate, multi-family, commercial and construction loans, represented 85.2% of the loan portfolio atSeptember 30, 2022 , compared to 84.1% atDecember 31, 2021 . 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$191.6 million and$105.6 million , respectively, atSeptember 30, 2022 , compared to$167.1 million and$78.5 million , respectively, atDecember 31, 2021 . No SNC relationships were 90 days or more delinquent atSeptember 30, 2022 . The Company had outstanding junior lien mortgages totaling$138.7 million atSeptember 30, 2022 . Of this total, three loans totaling$124,200 were 90 days or more delinquent with an allowance for credit losses of$2,300 . 47 -------------------------------------------------------------------------------- The following table sets forth information regarding the Company's non-performing assets as ofSeptember 30, 2022 andDecember 31, 2021 (in thousands): September 30, 2022 December 31, 2021 Mortgage loans: Residential $ 3,120 6,072 Commercial 35,352 16,887 Multi-family 1,583 439 Construction 1,878 2,365 Total mortgage loans 41,933 25,763 Commercial loans 17,181 20,582 Consumer loans 387 1,682 Total non-performing loans 59,501 48,027 Foreclosed assets 2,053 8,731 Total non-performing assets $ 61,554 56,758 The following table sets forth information regarding the Company's 60-89 day delinquent loans as ofSeptember 30, 2022 andDecember 31, 2021 (in thousands): September 30, 2022 December 31, 2021 Mortgage loans: Residential $ 302 1,131 Commercial - 3,960 Total mortgage loans 302 5,091 Commercial loans 1,135 1,289 Consumer loans 379 228 Total 60-89 day delinquent loans $ 1,816
6,608
AtSeptember 30, 2022 , the Company's allowance for credit losses related to the loan portfolio was 0.88% of total loans, compared to 0.84% atDecember 31, 2021 andSeptember 30, 2021 , respectively. The Company recorded a provision for credit losses on loans of$8.4 million and$5.0 million for the three and nine months endedSeptember 30, 2022 , compared with a provision of$1.0 million and a negative provision of$24.7 million for the three and nine months endedSeptember 30, 2021 , respectively. For the three and nine months endedSeptember 30, 2022 , the Company had net recoveries of$1.2 million and$2.9 million , respectively, compared to net charge-offs of$1.9 million and net recoveries of$3.3 million , respectively, for the same periods in 2021. The allowance for credit losses increased$7.9 million to$88.6 million atSeptember 30, 2022 from$80.7 million atDecember 31, 2021 . The increase in the period-over-period provision for credit losses was largely a function of the significant favorable impact of the post-pandemic recovery resulting in a large negative provision taken in the prior year period, combined with the current weakening economic forecast and an increase in total loans outstanding. Total non-performing loans were$59.5 million , or 0.59% of total loans atSeptember 30, 2022 , compared to$48.0 million , or 0.50% of total loans atDecember 31, 2021 . The$11.5 million increase in non-performing loans consisted of an$18.5 million increase in non-performing commercial mortgage loans, partially offset by a$3.4 million decrease in non-performing commercial loans, a$3.0 million decrease in non-performing residential mortgage loans, a$1.3 million decrease in non-performing consumer loans and a$487,000 decrease in non-performing construction loans. AtSeptember 30, 2022 andDecember 31, 2021 , the Company held foreclosed assets of$2.1 million and$8.7 million , respectively. During the nine months endedSeptember 30, 2022 , there were four additions to foreclosed assets with an aggregate carrying value of$1.1 million , three properties sold with an aggregate carrying value of$7.6 million and a valuation charge of$200,000 . Foreclosed assets atSeptember 30, 2022 consisted primarily of commercial real estate. Total non-performing assets atSeptember 30, 2022 increased$4.8 million to$61.6 million , or 0.45% of total assets, from$56.8 million , or 0.41% of total assets atDecember 31, 2021 . Cash and cash equivalents were$184.9 million atSeptember 30, 2022 , a$527.6 million decrease fromDecember 31, 2021 , primarily due to the reinvestment of excess liquidity into higher yielding loans, combined with a decrease in short term investments. 48 -------------------------------------------------------------------------------- Total investments were$2.28 billion atSeptember 30, 2022 , a$250.5 million decrease fromDecember 31, 2021 . This decrease was primarily due to an increase in unrealized losses on available for sale debt securities, repayments of mortgage-backed securities and maturities and calls of certain municipal and agency bonds, partially offset by purchases of mortgage-backed and municipal securities. Total deposits decreased$548.4 million during the nine months endedSeptember 30, 2022 , to$10.69 billion . Total savings and demand deposit accounts decreased$536.0 million to$10.01 billion atSeptember 30, 2022 , while total time deposits decreased$12.4 million to$680.1 million atSeptember 30, 2022 . The decrease in savings and demand deposits was largely attributable to a$296.3 million decrease in interest bearing demand deposits, as the Company shifted$360.0 million of brokered demand deposits into lower-costingFederal Home Loan Bank of New York ("FHLB") borrowings, a$196.9 million decrease in money market deposits and an$84.1 million decrease in non-interest bearing demand deposits, partially offset by a$41.3 million increase in savings deposits. The decrease in time deposits was primarily due to maturities of longer-term retail time deposits, partially offset by the inflow of brokered time deposits. Borrowed funds increased$436.8 million during the nine months endedSeptember 30, 2022 , to$1.06 billion . The increase in borrowings was largely due to the maturity and replacement of brokered deposits into lower-costing FHLB borrowings. Borrowed funds represented 7.8% of total assets atSeptember 30, 2022 , an increase from 4.5% atDecember 31, 2021 . Stockholders' equity decreased$146.1 million during the nine months endedSeptember 30, 2022 , to$1.55 billion , primarily due to an increase in unrealized losses on available for sale debt securities, dividends paid to stockholders and common stock repurchases, partially offset by net income earned for the period. For the nine months endedSeptember 30, 2022 , common stock repurchases totaled 2,045,037 shares at an average cost of$23.23 per share, of which 17,746 shares, at an average cost of$23.52 per share, were made in connection with withholding to cover income taxes on the vesting of stock-based compensation. AtSeptember 30, 2022 , 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 mortgage-backed 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, the COVID-19 pandemic and related government response and the
competitive marketplace can influence loan prepayments, prepayments on
mortgage-backed securities and deposit flows.
In response to the COVID-19 pandemic, the Company escalated the monitoring of deposit behavior, utilization of credit lines, and borrowing capacity with the FHLBNY and FRBNY, and continues to enhance its collateral position with these funding sources. TheFederal 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 theBasel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act, that were effectiveJanuary 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 onJanuary 1, 2020 , the Company elected to utilize the five-year CECL transition. 49 --------------------------------------------------------------------------------
At
regulatory capital requirements as follows:
September 30, 2022
Required with Capital Conservation
Required Buffer Actual
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Bank:(1)
Tier 1 leverage capital$ 526,697 4.00 %$ 526,697 4.00 %$ 1,222,092 9.28 % Common equity Tier 1 risk-based capital 525,767 4.50 817,860 7.00 1,222,092 10.46 Tier 1 risk-based capital 701,023 6.00 993,116 8.50 1,222,092 10.46 Total risk-based capital 934,697 8.00 1,226,790 10.50 1,302,104 11.14 Company: Tier 1 leverage capital$ 526,913 4.00 %$ 526,913 4.00 %$ 1,288,635 9.78 % Common equity Tier 1 risk-based capital 526,004 4.50 818,228 7.00 1,275,748 10.91 Tier 1 risk-based capital 701,338 6.00 993,562 8.50 1,288,635 11.02 Total risk-based capital 935,117 8.00 1,227,342 10.50 1,368,647 11.71 (1) Under theFDIC'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
30, 2022
General. The Company reported net income of$43.4 million , or$0.58 per basic and diluted share for the three months endedSeptember 30, 2022 , compared to net income of$37.3 million , or$0.49 per basic and diluted share, for the three months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , the Company reported net income of$126.6 million , or$1.69 per basic share and diluted share, compared to net income of$130.6 million , or$1.71 per basic share and$1.70 per diluted share, for the nine months endedSeptember 30, 2021 . Current quarter earnings were impacted by$2.9 million of non-tax deductible transaction costs related to the pending merger with Lakeland that was announced onSeptember 27, 2022 . Net Interest Income. Total net interest income increased$18.3 million to$109.5 million for the three months endedSeptember 30, 2022 , from$91.2 million for the three months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , total net interest income increased$31.4 million to$303.5 million , from$272.1 million for the same period in 2021. Interest income for the three months endedSeptember 30, 2022 increased$22.1 million to$121.7 million , from$99.6 million for the same period in 2021. For the nine months endedSeptember 30, 2022 , interest income increased$28.3 million to$329.0 million , from$300.7 million for the nine months endedSeptember 30, 2021 . Interest expense increased$3.9 million to$12.2 million for the three months endedSeptember 30, 2022 , from$8.4 million for the three months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , interest expense decreased$3.0 million to$25.5 million , from$28.5 million for the nine months endedSeptember 30, 2021 . The increase in net interest income for the three months endedSeptember 30, 2022 , was largely due to the period over period increase in the net interest margin resulting from the favorable repricing of adjustable rate loans and the reinvestment of cash flows from investment securities into higher-yielding loans. This was partially offset by the more modest unfavorable repricing of interest-bearing liabilities. For the three months endedSeptember 30, 2022 , fees related to the forgiveness of PPP loans decreased$2.4 million to$100,000 , compared to$2.5 million for the three months endedSeptember 30, 2021 . The increase in net interest income for the nine months endedSeptember 30, 2022 , was primarily driven by the favorable repricing of adjustable rate loans and an increase in rates on new loan originations. Net interest income was further enhanced by growth in lower-costing core and non-interest bearing deposits and increases in available for sale debt securities and total loans outstanding. This was partially offset by a reduction in fees related to the forgiveness of PPP loans. For the nine months endedSeptember 30, 2022 , fees related to the forgiveness of PPP loans decreased$7.9 million to$1.4 million , compared to$9.3 million for the nine months endedSeptember 30, 2021 . The net interest margin increased 57 basis points to 3.51% for the quarter endedSeptember 30, 2022 , compared to 2.94% for the quarter endedSeptember 30, 2021 . The weighted average yield on interest-earning assets increased 69 basis points to 3.90% for the quarter endedSeptember 30, 2022 , compared to 3.21% for the quarter endedSeptember 30, 2021 , while the weighted average cost of interest bearing liabilities increased 17 basis points for the quarter endedSeptember 30, 2022 to 0.54%, compared to the quarter endedSeptember 30, 2021 . The average cost of interest bearing deposits for the quarter ended 50 --------------------------------------------------------------------------------September 30, 2022 was 0.47%, compared to 0.30% for the same period last year. Average non-interest bearing demand deposits totaled$2.75 billion for the quarter endedSeptember 30, 2022 , compared to$2.55 billion for the quarter endedSeptember 30, 2021 . The average cost of total deposits, including non-interest bearing deposits, was 0.35% for the quarter endedSeptember 30, 2022 , compared with 0.23% for the quarter endedSeptember 30, 2021 . The average cost of borrowed funds for the quarter endedSeptember 30, 2022 was 1.11%, compared to 1.08% for the same period last year. For the nine months endedSeptember 30, 2022 , the net interest margin increased 25 basis points to 3.24%, compared to 2.99% for the nine months endedSeptember 30, 2021 . The weighted average yield on interest earning assets increased 20 basis points to 3.51% for the nine months endedSeptember 30, 2022 , compared to 3.31% for the nine months endedSeptember 30, 2021 , while the weighted average cost of interest bearing liabilities decreased five basis points to 0.38% for the nine months endedSeptember 30, 2022 , compared to 0.43% for the same period last year. The average cost of interest bearing deposits decreased one basis point to 0.33% for the nine months endedSeptember 30, 2022 , compared to 0.34% for the same period last year. Average non-interest bearing demand deposits totaled$2.77 billion for the nine months endedSeptember 30, 2022 , compared with$2.47 billion for the nine months endedSeptember 30, 2021 . The average cost of total deposits, including non-interest bearing deposits, was 0.25% for the nine months endedSeptember 30, 2022 , compared with 0.26% for the nine months endedSeptember 30, 2021 . The average cost of borrowings for the nine months endedSeptember 30, 2022 was 0.97%, compared to 1.13% for the same period last year. Interest income on loans secured by real estate increased$17.8 million to$80.3 million for the three months endedSeptember 30, 2022 , from$62.5 million for the three months endedSeptember 30, 2021 . Commercial loan interest income increased$747,000 to$25.2 million for the three months endedSeptember 30, 2022 , from$24.5 million for the three months endedSeptember 30, 2021 . Consumer loan interest income increased$440,000 to$3.8 million for the three months endedSeptember 30, 2022 , from$3.3 million for the three months endedSeptember 30, 2021 . For the three months endedSeptember 30, 2022 , the average balance of total loans increased$475.8 million to$9.91 billion , compared to the same period in 2021. The average yield on total loans for the three months endedSeptember 30, 2022 , increased 61 basis points to 4.38%, from 3.77% for the same period in 2021. Interest income on loans secured by real estate increased$25.8 million to$213.2 million for the nine months endedSeptember 30, 2022 , from$187.4 million for the nine months endedSeptember 30, 2021 . Commercial loan interest income decreased$5.4 million to$70.4 million for the nine months endedSeptember 30, 2022 , from$75.8 million for the nine months endedSeptember 30, 2021 . Consumer loan interest income increased$19,000 to$10.3 million for the nine months endedSeptember 30, 2022 , from$10.2 million for the nine months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , the average balance of total loans was$9.69 billion , compared with$9.58 billion for the same period in 2021. The average yield on total loans for the nine months endedSeptember 30, 2022 , increased 23 basis points to 4.01%, from 3.78% for the same period in 2021. Interest income on held to maturity debt securities decreased$222,000 to$2.4 million for the three months endedSeptember 30, 2022 , compared to the same period last year. Average held to maturity debt securities decreased$33.1 million to$399.4 million for the three months endedSeptember 30, 2022 , from$432.5 million for the same period last year. Interest income on held to maturity debt securities decreased$621,000 to$7.5 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021. Average held to maturity debt securities decreased$27.1 million to$413.1 million for the nine months endedSeptember 30, 2022 , from$440.3 million for the same period last year. Interest income on available for sale debt securities and FHLBNY stock increased$3.7 million to$9.6 million for the three months endedSeptember 30, 2022 , from$5.9 million for the three months endedSeptember 30, 2021 . The average balance of available for sale debt securities and FHLBNY stock increased$320.6 million to$2.00 billion for the three months endedSeptember 30, 2022 , compared to the same period in 2021. Interest income on available for sale debt securities and FHLBNY stock increased$8.8 million to$26.0 million for the nine months endedSeptember 30, 2022 , from$17.2 million for the same period last year. The average balance of available for sale debt securities and FHLBNY stock increased$626.5 million to$2.07 billion for the nine months endedSeptember 30, 2022 . The average yield on total securities increased to 2.36% for the three months endedSeptember 30, 2022 , compared with 1.32% for the same period in 2021. For the nine months endedSeptember 30, 2022 , the average yield on total securities increased to 1.72%, compared with 1.47% for the same period in 2021. Interest expense on deposit accounts increased$3.3 million to$9.6 million for the three month endedSeptember 30, 2022 , compared with$6.3 million for the three months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , interest expense on deposit accounts decreased$173,000 to$20.3 million , from$20.5 million for the same period last year. The average cost of interest bearing deposits increased to 0.47% and decreased to 0.33% for the three and nine months endedSeptember 30, 2022 , respectively, from 0.30% and 0.34% for the three and nine months endedSeptember 30, 2021 , 51 -------------------------------------------------------------------------------- respectively. The average balance of interest bearing core deposits for the three months endedSeptember 30, 2022 increased$13.4 million to$7.42 billion . For the nine months endedSeptember 30, 2022 , average interest bearing core deposits increased$563.2 million , to$7.62 billion , from$7.06 billion for the same period in 2021. Average time deposit account balances decreased$135.3 million to$669.6 million for the three months endedSeptember 30, 2022 , from$804.9 million for the three months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , average time deposit account balances decreased$232.5 million to$681.8 million , from$914.3 million for the same period in 2021. Interest expense on borrowed funds increased$750,000 to$2.5 million for the three months endedSeptember 30, 2022 , from$1.8 million for the three months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , interest expense on borrowed funds decreased$2.3 million to$4.8 million , from$7.1 million for the nine months endedSeptember 30, 2021 . The average cost of borrowings increased to 1.11% for the three months endedSeptember 30, 2022 , from 1.08% for the three months endedSeptember 30, 2021 . The average cost of borrowings decreased to 0.97% for the nine months endedSeptember 30, 2022 , from 1.13% for the same period last year. Average borrowings increased$256.4 million to$908.8 million for the three months endedSeptember 30, 2022 , from$652.4 million for the three months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , average borrowings decreased$180.9 million to$663.4 million , compared to$844.2 million for the nine months endedSeptember 30, 2021 . 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$8.4 million and$5.0 million provision for credit losses on loans for the three and nine months endedSeptember 30, 2022 , respectively, compared with a provision of$1.0 million and a negative provision of$24.7 million for the three and nine months endedSeptember 30, 2021 , respectively. The provision for credit losses in the quarter was largely a function of a weakening economic forecast, combined with additional specific reserves on impaired commercial loans of$2.4 million . The increase in the period-over-period provision for credit losses for the nine months endedSeptember 30, 2022 was largely a function of the significant favorable impact of the post-pandemic recovery resulting in a large negative provision taken in the prior year period, combined with the current weakening economic forecast and an increase in total loans outstanding. Non-Interest Income. Non-interest income totaled$28.4 million for the quarter endedSeptember 30, 2022 , an increase of$5.1 million , compared to the same period in 2021. Other income increased$6.2 million to$10.4 million for the three months endedSeptember 30, 2022 , compared to the quarter endedSeptember 30, 2021 , primarily due to an$8.6 million gain realized on the sale of a foreclosed commercial office property to a purchaser who intends to reposition the property to industrial use in the current quarter, partially offset by the prior year$3.4 million reduction in the contingent consideration related to the earn-out provisions of the 2019 purchase ofTirschwell & Loewy, Inc. ("T&L"). Additionally, insurance agency income increased$432,000 to$2.9 million for the three months endedSeptember 30, 2022 , compared to the quarter endedSeptember 30, 2021 , largely due to strong retention revenue. Partially offsetting these increases in non-interest income, wealth management income decreased$1.1 million to$6.8 million for the three months endedSeptember 30, 2022 , compared to the same period in 2021, primarily due to a decrease in the market value of assets under management, while BOLI income decreased$643,000 compared to the quarter endedSeptember 30, 2021 , to$1.2 million for the three months endedSeptember 30, 2022 , primarily due to a benefit claim recognized in the prior year. For the nine months endedSeptember 30, 2022 , non-interest income totaled$69.5 million , an increase of$3.4 million , compared to the same period in 2021. Other income increased$7.1 million to$13.5 million for the nine months endedSeptember 30, 2022 , compared to$6.4 million for the same period in 2021, primarily due to an$8.6 million gain realized on the sale of a foreclosed commercial office property to a purchaser who intends to reposition the property to industrial use and an increase in fees on loan-level interest rate swap transactions, partially offset by income recognized from a$3.4 million reduction in the contingent consideration related to the earn-out provisions of the 2019 purchase of T&L which was recorded in the prior year. Insurance agency income increased$1.1 million to$9.1 million for the nine months endedSeptember 30, 2022 , compared to$8.0 million for the same period in 2021, largely due to increases in contingent commissions, retention revenue and new business activity. Partially offsetting these increases to non-interest income, BOLI income decreased$2.0 million to$4.0 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021, primarily due to a decrease in benefit claims recognized and lower equity valuations. Wealth management income decreased$1.6 million to$21.3 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021, primarily due to a decrease in the market 52
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value of assets under management, partially offset by new business generation. Additionally, fee income decreased$1.1 million to$21.5 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021, primarily due to a decrease in debit card revenue, which was curtailed by the Durbin amendment beginningJuly 1, 2021 , partially offset by an increase in deposit related fees. Non-Interest Expense. For the three months endedSeptember 30, 2022 , non-interest expense totaled$69.4 million , an increase of$6.0 million , compared to the three months endedSeptember 30, 2021 . Other operating expenses increased$3.3 million to$12.2 million for the three months endedSeptember 30, 2022 , compared to the same period in 2021, primarily due to$2.9 million of transaction costs related to the recently announced pending merger with Lakeland. Data processing expense increased$772,000 to$5.6 million for the three months endedSeptember 30, 2022 , compared to the same period in 2021 largely due to increases in software subscription expense and online banking costs. Credit loss expense for off-balance sheet credit exposures increased$595,000 to$1.6 million for the three months endedSeptember 30, 2022 , compared to a$980,000 for the same period in 2021. The increase in the provision was primarily the result of the period-over-period relative change in projected loss factors. Additionally, compensation and benefits expense increased$525,000 to$38.1 million for three months endedSeptember 30, 2022 , compared to$37.6 million for the same period in 2021. The increase was principally due to increases in salary expense and stock-based compensation, partially offset by a decrease in the accrual for incentive compensation. Net occupancy expenses increased$502,000 to$8.5 million for the three months endedSeptember 30, 2022 , compared to the same period in 2021, largely due to increases in maintenance, depreciation and rent expenses. Non-interest expense totaled$195.2 million for the nine months endedSeptember 30, 2022 , an increase of$7.2 million , compared to$188.0 million for the nine months endedSeptember 30, 2021 . Compensation and benefits expense increased$4.8 million to$112.6 million for the nine months endedSeptember 30, 2022 , compared to$107.7 million for the nine months endedSeptember 30, 2021 , primarily due to increases in stock-based compensation and salary expense, partially offset by a decreases in the accrual for incentive compensation and post-retirement benefit expenses. Other operating expense increased$3.3 million to$31.4 million for the nine months endedSeptember 30, 2022 , compared to$28.0 million for the nine months endedSeptember 30, 2021 , primarily due to$2.9 million of transaction costs related to the recently announced pending merger with Lakeland and valuation charges on foreclosed real estate. Data processing expense increased$1.9 million to$16.6 million for the nine months endedSeptember 30, 2022 , mainly due to an increase in software subscription expenses. Additionally, net occupancy expense increased$1.1 million to$26.3 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021, mainly due to increases in rent, depreciation and maintenance expenses. Partially offsetting these increases, credit loss expense for off-balance sheet credit exposures decreased$3.9 million to a negative provision of$1.8 million for the nine months endedSeptember 30, 2022 , compared to a$2.2 million provision for the same period last year. The decrease was primarily the result of a decrease in the pipeline of loans approved and awaiting closing and an increase in line of credit utilization, partially offset by an increase in projected loss factors. Income Tax Expense. For the three months endedSeptember 30, 2022 , the Company's income tax expense was$16.7 million with an effective tax rate of 27.7%, compared with income tax expense of$12.9 million with an effective tax rate of 25.7% for the three months endedSeptember 30, 2021 . The increase in tax expense for the three months endedSeptember 30, 2022 , compared with the same period last year was largely the result of an increase in taxable income, while the increase in the effective tax rate for the three months endedSeptember 30, 2022 , compared with the three months endedSeptember 30, 2021 , was largely due to non-deductible merger related transaction costs of$2.9 million recognized in the current quarter and an increase in the proportion of income derived from taxable sources. For the nine months endedSeptember 30, 2022 , the Company's income tax expense was$46.2 million with an effective tax rate of 26.7%, compared with$44.4 million with an effective tax rate of 25.4% for the nine months endedSeptember 30, 2021 . The increase in tax expense for the nine months endedSeptember 30, 2022 , compared with the same period last year was largely the result of an increase in taxable income, while the increase in the effective tax rate for the nine months endedSeptember 30, 2022 , compared with the prior year was largely due to non-deductible merger related transaction costs of$2.9 million recognized in the current period and an increase in the proportion of income derived from taxable sources.
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