PROVIDENT FINANCIAL SERVICES INC 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Forward-Looking Statements Certain statements contained herein are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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, 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, inflation and changes in the interest rate environment that may reduce our margins and yields, may reduce the fair value of financial instruments or may reduce our volume of loan originations, or may increase the level of defaults, losses and prepayments on loans the Company has made and may make whether held in portfolio or sold in the secondary market, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity. In addition, the COVID-19 pandemic continues 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 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 have any obligation to update any forward-looking statements to reflect events or circumstances after the date of this statement. 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: 46 • Adequacy of the allowance for credit losses; and • Valuation of deferred tax assets On January 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 deviate from that of the wider industry. The historical PDR curves, together with corresponding economic conditions, establish a quantitative relationship between economic conditions and loan performance through an economic cycle. Using the historical relationship between economic conditions and loan performance, management’s expectation of future loan performance is incorporated using an externally developed economic forecast. This forecast is applied over a period that management has determined to be reasonable and supportable. Beyond the period over which management can develop or source a reasonable and supportable forecast, the model will revert to long-term average economic conditions using a straight-line, time-based methodology. The Company's current forecast period is six quarters, with a four quarter reversion period to historical average macroeconomic factors. The Company's economic forecast is approved by the Company's Asset-Liability Committee. The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics exist. The respective quantitative allowance for each loan segment is measured using an econometric, discounted PDR/LGD modeling methodology in which distinct, segment-specific multi-variate regression models are applied to an external economic forecast. Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and amortized cost basis. Contractual cash flows over the contractual life of the loans are the basis for modeled cash flows, adjusted for modeled defaults and expected prepayments and discounted at the loan-level effective interest rate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies at the reporting date: management has a reasonable expectation that a 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 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 of June 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 47 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 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 3 to the Consolidated Financial Statements for more information on the allowance for credit losses on loans. 48 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 at June 30, 2022 or December 31, 2021. COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2022 AND DECEMBER 31, 2021 Total assets at June 30, 2022 were $13.72 billion, a $65.3 million decrease from December 31, 2021. The decrease in total assets was primarily due to a $434.9 million decrease in cash and cash equivalents and a $115.8 million decrease in total investments, partially offset by a $410.8 million increase in total loans. The Company’s loan portfolio increased $410.8 million to $9.99 billion at June 30, 2022, from $9.58 billion at December 31, 2021. For the six months ended June 30, 2022, loan funding, including advances on lines of credit, totaled $2.15 billion, compared with $1.67 billion for the same period in 2021. Total PPP loans outstanding decreased $78.2 million to $16.7 million at June 30, 2022, from $94.9 million at December 31, 2021. Excluding the net decrease in PPP loans, during the six months ended June 30, 2022, the Company experienced net increases of $309.0 million in commercial mortgage loans, $81.3 million in commercial loans, $80.7 million in multi-family loans and $44.9 million in construction loans, partially offset by net decreases in residential mortgage and consumer loans of $21.7 million and $4.7 million, respectively. Commercial loans, consisting of commercial real estate, multi-family, commercial and construction loans, represented 85.0% of the loan portfolio at June 30, 2022, compared to 84.1% at December 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 $182.8 million and $117.5 million, respectively, at June 30, 2022, compared to $167.1 million and $78.5 million, respectively, at December 31, 2021. No SNC relationships were 90 days or more delinquent at June 30, 2022. The Company had outstanding junior lien mortgages totaling $137.9 million at June 30, 2022. Of this total, eight loans totaling $452,300 were 90 days or more delinquent with an allowance for credit losses of $6,900. The following table sets forth information regarding the Company’s non-performing assets as of June 30, 2022 and December 31, 2021 (in thousands): June 30, 2022 December 31, 2021 Mortgage loans: Residential $ 3,401 6,072 Commercial 18,627 16,887 Multi-family 2,040 439 Construction 3,466 2,365 Total mortgage loans 27,534 25,763 Commercial loans 11,950 20,582 Consumer loans 964 1,682 Total non-performing loans 40,448 48,027 Foreclosed assets 9,076 8,731 Total non-performing assets $ 49,524 56,758 The following table sets forth information regarding the Company’s 60-89 day delinquent loans as of June 30, 2022 and December 31, 2021 (in thousands): 49 June 30, 2022 December 31, 2021 Mortgage loans: Residential $ 1,752 1,131 Commercial — 3,960 Total mortgage loans 1,752 5,091 Commercial loans 41 1,289 Consumer loans 169 228 Total 60-89 day delinquent loans $ 1,962 6,608 At June 30, 2022, the Company’s allowance for credit losses related to the loan portfolio was 0.79% of total loans, compared to 0.84% and 0.85% at December 31, 2021 and June 30, 2021, respectively. The Company recorded a provision for credit losses on loans of $3.0 million for the three months ended June 30, 2022 and a negative provision for credit losses on loans of $3.4 million for the six months ended June 30, 2022, compared with negative provisions of $10.7 million and $25.7 million for the three and six months ended June 30, 2021, respectively. For the three and six months ended June 30, 2022, the Company had net charge-offs of $259,000 and net recoveries of $1.7 million, respectively, compared to net recoveries of $6.1 million and $5.2 million, respectively, for the same periods in 2021. The allowance for credit losses decreased $1.7 million to $79.0 million at June 30, 2022 from $80.7 million at December 31, 2021. The decrease in the period-over-period provision benefit was largely a function of the relative change in the economic outlook and the significant favorable impact of the post-pandemic recovery in the prior year period. Total non-performing loans were $40.4 million, or 0.40% of total loans at June 30, 2022, compared to $48.0 million, or 0.50% of total loans at December 31, 2021. The $7.6 million decrease in non-performing loans consisted of an $8.6 million decrease in non-performing commercial loans, a $2.7 million decrease in non-performing residential mortgage loans and a $718,000 decrease in non-performing consumer loans, partially offset by a $1.7 million increase in non-performing commercial mortgage loans and a $1.1 million increase in non-performing construction loans. At June 30, 2022 and December 31, 2021, the Company held foreclosed assets of $9.1 million and $8.7 million, respectively. During the six months ended June 30, 2022, there were two additions to foreclosed assets with an aggregate carrying value of $625,000, one property sold with an aggregate carrying value of $80,000 and a valuation charge of $200,000. Foreclosed assets at June 30, 2022 consisted primarily of commercial real estate. Total non-performing assets at June 30, 2022 decreased $7.2 million to $49.5 million, or 0.36% of total assets, from $56.8 million, or 0.41% of total assets at December 31, 2021. Cash and cash equivalents were $277.5 million at June 30, 2022, a $434.9 million decrease from December 31, 2021, primarily as a result of decreases in short term investments. Total investments were $2.41 billion at June 30, 2022, a $115.8 million decrease from December 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 $359.8 million during the six months ended June 30, 2022, to $10.87 billion. Total savings and demand deposit accounts decreased $333.9 million to $10.21 billion at June 30, 2022, while total time deposits decreased $25.9 million to $666.6 million at June 30, 2022. The decrease in savings and demand deposits was largely attributable to a $463.6 million decrease in interest bearing demand deposits, as the Company shifted $360.0 million of brokered demand deposits into lower-costing Federal Home Loan Bank of New York ("FHLB") borrowings, partially offset by a $52.3 million increase in non-interest bearing demand deposits, a $51.8 million increase in savings deposits and a $25.5 million increase in money market 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 $375.7 million during the six months ended June 30, 2022, to $1.00 billion. The increase in borrowings for the period was largely due to the maturity and replacement of brokered deposits into lower-costing FHLB borrowings. Borrowed funds represented 7.3% of total assets at June 30, 2022, an increase from 4.5% at December 31, 2021. Stockholders’ equity decreased $111.8 million during the six months ended June 30, 2022, to $1.59 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 three months ended June 30, 2022, common stock repurchases totaled 760,466 shares at an average cost of $23.00 per share. For the six months ended June 30, 2022, common stock repurchases totaled 2,042,541 shares at an average cost of $23.23 per share, of which 15,457 shares, at an average cost of $23.48 per share, were made in connection with withholding to cover income taxes on the vesting of stock-based compensation. 50 At June 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, deposit outflows 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. The Federal Deposit Insurance Corporation ("FDIC") and the other federal bank regulatory agencies issued a final rule that revised the leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act, that were effective January 1, 2015. Among other things, the rule established a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), adopted a uniform minimum leverage capital ratio at 4%, increased the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigned a higher risk weight (150%) to exposures that are more than 90 days past due or are on non-accrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The rule also required unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital unless a one-time opt-out was exercised. The Company exercised the option to exclude unrealized gains and losses from the calculation of regulatory capital. Additional constraints were also imposed on the inclusion in regulatory capital of mortgage-servicing assets, deferred tax assets and minority interests. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer,” of 2.5% in addition to the amount necessary to meet its minimum risk-based capital requirements. In the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule providing banking institutions that adopted CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five year transition in total). In connection with its adoption of CECL on January 1, 2020, the Company elected to utilize the five-year CECL transition. At June 30, 2022, the Bank and the Company exceeded all current minimum regulatory capital requirements as follows: June 30, 2022 Required Required with Capital Conservation Buffer Actual Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Bank: (1) Tier 1 leverage capital $ 523,409 4.00 % $ 523,409 4.00 % $ 1,194,859 9.13 % Common equity Tier 1 risk-based capital 507,414 4.50 789,310 7.00 1,194,859 10.60 Tier 1 risk-based capital 676,551 6.00 958,448 8.50 1,194,859 10.60 Total risk-based capital 902,069 8.00 1,183,965 10.50 1,263,666 11.21 Company: Tier 1 leverage capital $ 523,629 4.00 % $ 523,629 4.00 % $ 1,259,463 9.62 % Common equity Tier 1 risk-based capital 507,656 4.50 789,687 7.00 1,246,576 11.05 Tier 1 risk-based capital 676,874 6.00 958,905 8.50 1,259,463 11.16 Total risk-based capital 902,499 8.00 1,184,530 10.50 1,328,270 11.77 (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%. 51 COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021 General . The Company reported net income of $39.2 million, or $0.53 per basic and diluted share for the three months ended June 30, 2022, compared to net income of $44.8 million, or $0.58 per basic and diluted share for the three months ended June 30, 2021. For the six months ended June 30, 2022, the Company reported net income of $83.2 million, or $1.11 per basic share and diluted share, compared to net income of $93.3 million, or $1.22 per basic and diluted share, for the same period last year. Net Interest Income . Total net interest income increased $8.6 million to $99.5 million for the three months ended June 30, 2022, from $90.9 million for the three months ended June 30, 2021. For the six months ended June 30, 2022, total net interest income increased $13.1 million to $194.0 million, from $180.9 million for the same period in 2021. Interest income for the three months ended June 30, 2022 increased $5.7 million to $106.3 million, from $100.5 million for the same period in 2021. For the six months ended June 30, 2022, interest income increased $6.2 million to $207.3 million, from $201.1 million for the six months ended June 30, 2021. Interest expense decreased $2.8 million to $6.8 million for the three months ended June 30, 2022, from $9.6 million for the three months ended June 30, 2021. For the six months ended June 30, 2022, interest expense decreased $6.9 million to $13.3 million, from $20.2 million for the six months ended June 30, 2021. The increase in net interest income for the three months ended June 30, 2022, was primarily driven by growth in average earning assets, largely due to increases in available for sale debt securities and average loans outstanding, funded by growth in lower-costing core deposits and the reinvestment of cash proceeds from PPP loan satisfactions. The increase in net interest income for the six months ended June 30, 2022, was primarily driven by a reduction in funding costs, growth in lower-costing core and non-interest bearing deposits and an increase in available for sale debt securities. Net interest income was further enhanced by the favorable repricing of adjustable rate loans and an increase in rates on new loan originations. Both periods increase in net interest income were partially offset by a reduction in fees related to the forgiveness of PPP loans. For the three and six months ended June 30, 2022, the accretion of fees related to the forgiveness of PPP loans totaled $192,000 and $1.3 million, respectively, which were recognized in interest income, compared to $2.9 million and $6.9 million for the three and six months ended June 30, 2021. The net interest margin increased 22 basis points to 3.21% for the quarter ended June 30, 2022, compared to 2.99% for the quarter ended June 30, 2021. The weighted average yield on interest-earning assets increased 12 basis points to 3.43% for the quarter ended June 30, 2022, compared to 3.31% for the quarter ended June 30, 2021, while the weighted average cost of interest bearing liabilities decreased 13 basis points for the quarter ended June 30, 2022 to 0.31%, compared to the quarter ended June 30, 2021. The average cost of interest bearing deposits for the quarter ended June 30, 2022 was 0.27%, compared to 0.34% for the same period last year. Average non-interest bearing demand deposits totaled $2.78 billion for the quarter ended June 30, 2022, compared to $2.48 billion for the quarter ended June 30, 2021. The average cost of total deposits, including non-interest bearing deposits, was 0.20% for the quarter ended June 30, 2022, compared with 0.26% for the quarter ended June 30, 2021. The average cost of borrowed funds for the quarter ended June 30, 2022 was 0.84%, compared to 1.18% for the same period last year. For the six months ended June 30, 2022, the net interest margin increased nine basis points to 3.11%, compared to 3.02% for the six months ended June 30, 2021. The weighted average yield on interest earning assets declined three basis points to 3.33% for the six months ended June 30, 2022, compared to 3.36% for the six months ended June 30, 2021, while the weighted average cost of interest bearing liabilities decreased 16 basis points to 0.30% for the six months ended June 30, 2022, compared to 0.46% for the same period last year. The average cost of interest bearing deposits decreased 10 basis points to 0.26% for the six months ended June 30, 2022, compared to 0.36% for the same period last year. Average non-interest bearing demand deposits totaled $2.78 billion for the six months ended June 30, 2022, compared with $2.43 billion for the six months ended June 30, 2021. The average cost of total deposits, including non-interest bearing deposits, was 0.19% for the six months ended June 30, 2022, compared with 0.28% for the six months ended June 30, 2021. The average cost of borrowings for the six months ended June 30, 2022 was 0.85%, compared to 1.15% for the same period last year. Interest income on loans secured by real estate increased $6.2 million to $69.1 million for the three months ended June 30, 2022, from $62.9 million for the three months ended June 30, 2021. Commercial loan interest income decreased $2.8 million to $22.4 million for the three months ended June 30, 2022, from $25.2 million for the three months ended June 30, 2021. Consumer loan interest income decreased $68,000 to $3.3 million for the three months ended June 30, 2022, from $3.4 million for the three months ended June 30, 2021. For the three months ended June 30, 2022, the average balance of total loans increased $94.4 million to $9.68 billion, compared to the same period in 2021. The average yield on total loans for the three months ended June 30, 2022, increased 10 basis points to 3.89%, from 3.79% for the same period in 2021. Interest income on loans secured by real estate increased $8.0 million to $132.9 million for the six months ended June 30, 2022, from $124.9 million for the six months ended June 30, 2021. Commercial loan interest income decreased $6.1 million to $45.2 million for the six months ended June 30, 2022, from $51.3 million for the six months ended June 30, 2021. Consumer loan interest income decreased $421,000 to $6.5 million for the six months ended June 30, 2022, from $6.9 million for the six 52 months ended June 30, 2021. For the six months ended June 30, 2022, the average balance of total loans was $9.58 billion, compared with $9.66 billion for the same period in 2021. The average yield on total loans for the six months ended June 30, 2022, increased five basis points to 3.84%, from 3.79% for the same period in 2021. Interest income on held to maturity debt securities decreased $211,000 to $2.5 million for the three months ended June 30, 2022, compared to the same period last year. Average held to maturity debt securities decreased $25.9 million to $412.2 million for the three months ended June 30, 2022, from $438.1 million for the same period last year. Interest income on held to maturity debt securities decreased $399,000 to $5.1 million for the six months ended June 30, 2022, compared to the same period in 2021. Average held to maturity debt securities decreased $24.1 million to $420.1 million for the six months ended June 30, 2022, from $444.2 million for the same period last year. Interest income on available for sale debt securities and FHLBNY stock increased $2.7 million to $8.5 million for the three months ended June 30, 2022, from $5.7 million for the three months ended June 30, 2021. The average balance of available for sale debt securities and FHLBNY stock increased $607.7 million to $2.05 billion for the three months ended June 30, 2022, compared to the same period in 2021. Interest income on available for sale debt securities and FHLBNY stock increased $5.1 million to $16.4 million for the six months ended June 30, 2022, from $11.3 million for the same period last year. The average balance of available for sale debt securities and FHLBNY stock increased $782.1 million to $2.10 billion for the six months ended June 30, 2022. The average yield on total securities increased to 1.74% for the three months ended June 30, 2022, compared with 1.46% for the same period in 2021. For the six months ended June 30, 2022, the average yield on total securities increased to 1.59%, compared with 1.57% for the same period in 2021. Interest expense on deposit accounts decreased $1.2 million to $5.6 million for the three month ended June 30, 2022, compared with $6.8 million for the three month ended June 30, 2021. For the six months ended June 30, 2022, interest expense on deposit accounts decreased $3.4 million to $10.8 million, from $14.2 million for the same period last year. The average cost of interest bearing deposits decreased to 0.27% and 0.26% for the three and six months ended June 30, 2022, respectively, from 0.34% and 0.36% for the three and six months ended June 30, 2021, respectively. The average balance of interest bearing core deposits for the three months ended June 30, 2022 increased $608.5 million to $7.69 billion. For the six months ended June 30, 2022, average interest bearing core deposits increased $842.6 million, to $7.73 billion, from $6.88 billion for the same period in 2021. Average time deposit account balances decreased $202.6 million to $695.0 million for the three months ended June 30, 2022, from $897.6 million for the three months ended June 30, 2021. For the six months ended June 30, 2022, average time deposit account balances decreased $282.0 million to $688.0 million, from $969.9 million for the same period in 2021. Interest expense on borrowed funds decreased $1.4 million to $1.1 million for the three months ended June 30, 2022, from $2.6 million for the three months ended June 30, 2021. For the six months ended June 30, 2022, interest expense on borrowed funds decreased $3.1 million to $2.3 million, from $5.4 million for the six months ended June 30, 2021. The average cost of borrowings decreased to 0.84% for the three months ended June 30, 2022, from 1.18% for the three months ended June 30, 2021. The average cost of borrowings decreased to 0.85% for the six months ended June 30, 2022, from 1.15% for the same period last year. Average borrowings decreased $341.4 million to $527.6 million for the three months ended June 30, 2022, from $869.0 million for the three months ended June 30, 2021. For the six months ended June 30, 2022, average borrowings decreased $403.1 million to $538.6 million, compared to $941.7 million for the six months ended June 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 a $3.0 million provision for credit losses on loans for the three months ended June 30, 2022 and a $3.4 million negative provision for credit losses for the six months ended June 30, 2022, compared with negative provisions of $10.7 million and $25.7 million for the three and six months ended June 30, 2021, respectively. The increase in the provision for the three months ended June 30, 2022 was largely a function of the relative change in the economic outlook and the significant favorable impact of the post-pandemic recovery in the prior year period, partially offset by an overall improvement in the Company's asset quality. The decrease in the period-over-period provision benefit for the six months ended June 30, 2022, compared to the same period last year, was largely a result of growth in the loan portfolio, the relative change in the economic outlook and the significant favorable impact of the post-pandemic recovery in the prior year period. 53 Non-Interest Income. Non-interest income totaled $20.9 million for the three months ended June 30, 2022, a decrease of $224,000, compared to the same period in 2021. Fee income decreased $1.0 million to $7.4 million for the three months ended June 30, 2022, compared to the same period in 2021, primarily due to decreases in debit card revenue and commercial loan prepayment fees, partially offset by an increase in deposit related fees. The decrease in debit card revenue was largely attributable to the interchange transaction fee limitation imposed by the Durbin amendment, which became effective for the Company in the third quarter of 2021. Wealth management income decreased $835,000 to $7.0 million for the three months ended June 30, 2022, compared to the same period in 2021, primarily due to a decrease in the market value of assets under management. Partially offsetting these decreases in non-interest income, other income increased $1.5 million to $1.9 million for the three months ended June 30, 2022, compared to the quarter ended June 30, 2021, primarily due to increases in net fees on loan-level interest rate swap transactions and net gains on the sale of loans. For the six months ended June 30, 2022, non-interest income totaled $41.1 million, a decrease of $1.7 million, compared to the same period in 2021. Fee income decreased $1.3 million to $14.3 million for the six months ended June 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, partially offset by an increase in deposit related fees. BOLI income decreased $1.3 million to $2.7 million for the six months ended June 30, 2022, compared to the same period in 2021, primarily due to lower equity valuations and a decrease in benefit claims recognized. Wealth management income decreased $504,000 to $14.5 million for the six months ended June 30, 2022, compared to the same period in 2021, primarily due to a decrease in the market value of assets under management and a decrease in tax preparation fees, partially offset with new business generation. Partially offsetting these decreases in non-interest income, other income increased $864,000 to $3.1 million for the six months ended June 30, 2022, compared to $2.2 million for the same period in 2021, mainly due to an increase in net fees on loan-level interest rate swap transactions. Also, insurance agency income totaled $6.3 million, an increase of $694,000 for the six months ended June 30, 2022, compared to the same period in 2021, largely due to an increase in contingent commissions. Non-Interest Expense. For the three months ended June 30, 2022, non-interest expense totaled $63.8 million, an increase of $1.1 million, compared to the three months ended June 30, 2021. Compensation and benefits expense increased $2.6 million to $37.4 million for three months ended June 30, 2022, compared to $34.9 million for the same period in 2021. The increase was principally due to increases in stock-based compensation, salary expense and the accrual for incentive compensation, partially offset by a decline in employee medical expenses. Other operating expenses increased $780,000 to $9.8 million for the three months ended June 30, 2022, compared to the same period in 2021, principally due to an increase in business development expenses. Net occupancy expenses increased $572,000 to $8.5 million for the three months ended June 30, 2022, compared to the same period in 2021, largely due to increases in rent, depreciation and maintenance expenses, while FDIC insurance decreased $220,000 due to a decrease in the insurance assessment rate, partially offset by an increase in total assets subject to assessment. Partially offsetting these increases in non-interest expense, credit loss expense for off-balance sheet credit exposures decreased $3.0 million to a negative provision of $1.0 million for the three months ended June 30, 2022, compared to a $2.1 million provision for the same period in 2021. The decrease was primarily the result of a decrease in the pipeline of loans approved and awaiting closing, combined with an increase in line of credit utilization, partially offset by an increase in loss factors. Non-interest expense totaled $125.7 million for the six months ended June 30, 2022, an increase of $1.2 million, compared to $124.6 million for the six months ended June 30, 2021. Compensation and benefits expense increased $4.3 million to $74.5 million for the six months ended June 30, 2022, compared to $70.2 million for the six months ended June 30, 2021, primarily due to increases in stock-based compensation, salary expense and the accrual for incentive compensation, partially offset by a decrease in employee benefit expenses. Data processing expense increased $1.2 million to $11.0 million for the six months ended June 30, 2022, mainly due to increases in software subscription expense and online banking costs. Additionally, net occupancy expense increased $602,000 to $17.8 million for the six months ended June 30, 2022, compared to the same period in 2021, mainly due to increases in rent, depreciation and maintenance expenses, a portion of which were attributable to the Company's new administrative offices. Partially offsetting these increases, credit loss expense for off-balance sheet credit exposures decreased $4.5 million to a negative provision of $3.4 million for the six months ended June 30, 2022, compared to a $1.2 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, combined with an increase in line of credit utilization, partially offset by an increase in loss factors. FDIC insurance decreased $785,000 for the six months ended June 30, 2022, primarily due to a decrease in the insurance assessment rate, partially offset by an increase in total assets subject to assessment. Income Tax Expense. For the three months ended June 30, 2022, the Company’s income tax expense was $14.3 million with an effective tax rate of 26.8%, compared with income tax expense of $15.3 million with an effective tax rate of 25.4% for the three months ended June 30, 2021. The decrease in tax expense for the three months ended June 30, 2022, compared with the same period last year was largely the result of a decrease in taxable income, while the increase in the effective tax rate for the 54 three months ended June 30, 2022, compared with the three months ended June 30, 2021, was largely due to an increase in the proportion of income derived from taxable sources. For the six months ended June 30, 2022, the Company's income tax expense was $29.6 million with an effective tax rate of 26.2%, compared with $31.5 million with an effective tax rate of 25.2% for the six months ended June 30, 2021. The decrease in tax expense for the six months ended June 30, 2022, compared with the same period last year was largely the result of a decrease in taxable income, while the increase in the effective tax rate for the six months ended June 30, 2021, compared with the prior year was largely due to an increase in the proportion of income derived from taxable sources.