What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-10 compared with 2022-11-09 · 182 added, 185 removed, 119 unchanged (76% of the section changed)

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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, 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;

Government, the effects of the recent turmoil in the banking industry (including the closing of three financial institutions), changes in accounting policies and practices that may be adopted by the regulatory agencies and the accounting standards setters, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, 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;

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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.

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The Company does not assume any duty, and does not undertake, to update any forward-looking statements to reflect events or circumstances after the date of this statement.

Lakeland Bancorp, Inc.

Merger Agreement

On September 26, 2022, the Company entered into a definitive merger agreement pursuant to which it will merge (the “merger”) with Lakeland Bancorp, Inc.

("Lakeland"), and Lakeland Bank, a wholly owned subsidiary of Lakeland, will merge with and into Provident Bank, a wholly owned subsidiary of the Company.

The merger agreement has been unanimously approved by the boards of 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

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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;

• 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 Company has identified the allowance for credit losses on loans as a critical accounting policy

The allowance for credit losses is a valuation account that reflects management’s evaluation of the current expected credit losses in the loan portfolio.

The Company maintains the allowance for credit losses through provisions for credit losses that are charged, or credited to income.

The Company maintains the allowance for credit losses through provisions for credit losses that are charged to income.

Charge-offs against the allowance for credit losses are taken on loans where management determines that the collection of loan principal and interest is unlikely.

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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.

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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.

management has a reasonable expectation that a 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 the option being exercised by the borrower and appropriately extend the maturity for modeling purposes.

The Company considers qualitative adjustments to credit loss estimates for information not already captured in the quantitative component of the loss estimation process.

Qualitative factors are based on portfolio concentration levels, model imprecision, changes in industry conditions, changes in the Company’s loan review process, changes in the Company’s loan policies and procedures, and economic forecast uncertainty.

One of the most significant judgments involved in estimating the Company’s allowance for credit losses relates to the macroeconomic forecasts used to estimate expected credit losses over the forecast period.

As of March 31, 2023, the model incorporated Moody’s baseline economic forecast, as adjusted for qualitative factors, as well as an extensive review of classified loans and loans that were classified as impaired with a specific reserve assigned to those loans.

This baseline outlook reflected a worsening economic forecast and related deterioration in the projected commercial property price index over the expected life of the loan portfolio and resulted in a recorded provision of $6.0 million for the three months ended, March 31, 2023 and a coverage ratio of 91 basis points.

If the Company had used a more pessimistic forecast (“next-cycle recession”), the provision would have increased $10.7 million, with a coverage ratio of 101 basis points.

Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses.

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The segments have been combined or sub-segmented as needed to ensure loans of similar risk profiles are appropriately pooled.

As of September 30, 2022, the portfolio and class segments for the Company’s loan portfolio were:

As of March 31, 2023, the portfolio and class segments for the Company’s loan portfolio were:

• Mortgage Loans – Residential, Commercial Real Estate, Multi-Family and Construction

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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.

Generally, the Company only evaluates loans individually for impairment if the loan is non-accrual, non-homogeneous and the balance is at least $1.0 million.

For all classes of loans deemed collateral-dependent, the Company estimates expected credit losses based on the fair value of the collateral less any selling costs.

If the loan is not collateral dependent, the allowance for credit losses related to individually assessed loans is based on discounted expected cash flows using the loan’s initial effective interest rate.

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.

For loans acquired that have experienced more-than-insignificant deterioration in credit quality since their origination are considered PCD loans.

The Company evaluates acquired loans for deterioration in credit quality based on any of, but not limited to, the following:

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(4) watchlist credits;

and (5) delinquency status, including loans that are current on acquisition date, but had been previously delinquent.

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.

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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.

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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.

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.

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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 at September 30, 2022 or December 31, 2021.

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2022 AND DECEMBER 31, 2021

Total assets at September 30, 2022 were $13.60 billion, a $177.4 million decrease from December 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 at September 30, 2022, from $9.58 billion at December 31, 2021.

For the nine months ended September 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 at September 30, 2022, from $94.9 million at December 31, 2021.

Excluding the decrease in PPP loans, during the nine months ended September 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 at September 30, 2022, compared to 84.1% at December 31, 2021.

For the three months ended March 31, 2023, the provision for credit losses on loans totaled $6.0 million, compared to a negative provision for credit losses of $6.4 million for the quarter ended March 31, 2022.

The increase in provision was attributable to a worsening economic forecast and related deterioration in the projected commercial property price index over the expected life of the loan portfolio, combined with an increase in total loans outstanding.

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2023 AND DECEMBER 31, 2022

Total assets at March 31, 2023 were $13.78 billion, a $4.5 million decrease from December 31, 2022.

The Company’s loan portfolio decreased $24.7 million to $10.22 billion at March 31, 2023, from $10.25 billion at December 31, 2022.

For the three months ended March 31, 2023, loan funding, including advances on lines of credit, totaled $809.2 million, compared with $959.4 million for the same period in 2022.

During the three months ended March 31, 2023, the loan portfolio had net decreases of $56.6 million in construction loans, $23.3 million in commercial mortgage loans, $5.5 million in commercial loans, $3.7 million in residential mortgage loans and $3.1 million in consumer loans, partially offset by a net increase of $66.5 million in multi-family mortgage loans.

Commercial real estate, commercial and construction loans represented 85.6% of the total loan portfolio at March 31, 2023, unchanged from 85.6% at December 31, 2022.

The Company participates in loans originated by other banks, including participations designated as Shared National Credits (“SNCs”).

The Company’s gross commitments and outstanding balances as a participant in SNCs were $191.6 million and $105.6 million, respectively, at September 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 September 30, 2022.

The Company had outstanding junior lien mortgages totaling $138.7 million at September 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.

The following table sets forth information regarding the Company’s non-performing assets as of September 30, 2022 and December 31, 2021 (in thousands):

September 30, 2022 December 31, 2021

The Company’s gross commitments and outstanding balances as a participant in SNCs were $211.3 million and $99.6 million, respectively, at March 31, 2023, compared to $203.9 million and $87.3 million, respectively, at December 31, 2022.

No SNC relationships were 90 days or more delinquent at March 31, 2023.

The Company had outstanding junior lien mortgages totaling $134.8 million at March 31, 2023.

Of this total, six loans totaling $153,753 were 90 days or more delinquent with an allowance for credit losses of $2,575.

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

March 31, 2023 December 31, 2022

Mortgage loans:

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Total non-performing assets $ 49,199 $ 60,633

The following table sets forth information regarding the Company’s 60-89 day delinquent loans as of September 30, 2022 and December 31, 2021 (in thousands):

September 30, 2022 December 31, 2021

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

March 31, 2023 December 31, 2022

Mortgage loans:

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Commercial 1,528 412

Multi-family 785 —

Construction — 1,097

Total mortgage loans 2,952 2,623

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Total 60-89 day delinquent loans $ 6,130 $ 3,784

At September 30, 2022, the Company’s allowance for credit losses related to the loan portfolio was 0.88% of total loans, compared to 0.84% at December 31, 2021 and September 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 ended September 30, 2022, compared with a provision of $1.0 million and a negative provision of $24.7 million for the three and nine months ended September 30, 2021, respectively.

For the three and nine months ended September 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 at September 30, 2022 from $80.7 million at December 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 at September 30, 2022, compared to $48.0 million, or 0.50% of total loans at December 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.

At September 30, 2022 and December 31, 2021, the Company held foreclosed assets of $2.1 million and $8.7 million, respectively.

During the nine months ended September 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 at September 30, 2022 consisted primarily of commercial real estate.

Total non-performing assets at September 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 at December 31, 2021.

Cash and cash equivalents were $184.9 million at September 30, 2022, a $527.6 million decrease from December 31, 2021, primarily due to the reinvestment of excess liquidity into higher yielding loans, combined with a decrease in short term investments.

Total investments were $2.28 billion at September 30, 2022, a $250.5 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 $548.4 million during the nine months ended September 30, 2022, to $10.69 billion.

Total savings and demand deposit accounts decreased $536.0 million to $10.01 billion at September 30, 2022, while total time deposits decreased $12.4 million to $680.1 million at September 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-costing Federal 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 ended September 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 at September 30, 2022, an increase from 4.5% at December 31, 2021.

Stockholders’ equity decreased $146.1 million during the nine months ended September 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 ended September 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.

At September 30, 2022, approximately 1.1 million shares remained eligible for repurchase under the current stock repurchase authorization.

At March 31, 2023, the Company’s allowance for credit losses related to the loan portfolio was 0.91% of total loans, compared to 0.86% and 0.79% at December 31, 2022 and March 31, 2022, respectively.

The Company recorded a provision for credit losses on loans of $6.0 million for the three months ended March 31, 2023 compared with a benefit of $6.4 million for the three months ended March 31, 2022.

For the three months ended March 31, 2023, the Company had net charge-offs of $671,000, compared to net recoveries of $1.9 million for the same period in 2022.

The allowance for credit losses increased $4.7 million to $92.8 million at March 31, 2023 from $88.0 million at December 31, 2022.

The increase in the allowance for credit losses on loans was attributable to a worsening economic forecast and related deterioration in the projected commercial property price index over the expected life of the loan portfolio.

Total non-performing loans were $35.5 million, or 0.35% of total loans at March 31, 2023, compared to $58.5 million, or 0.57% of total loans at December 31, 2022.

The $23.1 million decrease in non-performing loans at March 31, 2023, compared to the trailing quarter, consisted of a $21.4 million decrease in non-performing commercial mortgage loans, a $1.1 million decrease in non-performing commercial loans, a $392,000 decrease in non-performing consumer loans and a $184,000 decrease in non-performing residential mortgage loans.

Within the $21.4 million decrease in non-performing commercial mortgage loans, one loan totaling $12.2 million was moved to foreclosed assets in the current quarter.

At March 31, 2023, December 31, 2022 and March 31, 2022, the Company held foreclosed assets of $13.7 million, $2.1 million and $8.6 million, respectively.

During the three months ended March 31, 2023, there were two additions to foreclosed assets with an aggregate carrying value of $12.3 million and three properties sold with an aggregate carrying value of $666,000.

Foreclosed assets at March 31, 2023 consisted primarily of commercial real estate.

Total non-performing assets at March 31, 2023 decreased $11.4 million to $49.2 million, or 0.36% of total assets, from $60.6 million, or 0.44% of total assets at December 31, 2022.

Total investments were $2.28 billion at March 31, 2023, a $23.6 million increase from December 31, 2022.

This increase was largely due to a $27.8 million decrease in unrealized losses on available for sale debt securities, combined with purchases of

mortgage-backed and municipal securities, partially offset by repayments of mortgage-backed securities and maturities and calls of certain municipal and agency bonds.

Total deposits decreased $265.7 million during the three months ended March 31, 2023, to $10.30 billion.

Total savings and demand deposit accounts decreased $452.9 million to $9.36 billion at March 31, 2023, while total time deposits increased $187.2 million to $938.6 million at March 31, 2023.

The decrease in savings and demand deposits was largely attributable to a $257.5 million decrease in money market deposits, a $153.2 million decrease in non-interest bearing demand deposits, and an $87.4 million decrease in savings deposits, partially offset by a $45.2 million increase in interest bearing demand deposits.

During the three months ended March 31, 2023, deposit balances from traditional non-interest and interest bearing demand deposits transitioned into our insured cash sweep ("ICS") product, as a method to increase the level of customers' deposit insurance in light of recent market turmoil.

The Bank's ICS deposits increased $139.9 million to $198.8 million at March 31, 2023, from $58.9 million at December 31, 2022.

The increase in time deposits consisted of a $134.2 million increase in retail time deposits and a $53.0 million increase in brokered time deposits.

Borrowed funds increased $247.4 million during the three months ended March 31, 2023, to $1.58 billion.

The increase in borrowings was largely due to the replacement of demand deposits with FHLB borrowings and asset funding requirements.

Borrowed funds represented 11.5% of total assets at March 31, 2023, an increase from 9.7% at December 31, 2022.

Stockholders’ equity increased $42.4 million during the three months ended March 31, 2023, to $1.64 billion, primarily due to a decrease in unrealized losses on available for sale debt securities and net income earned for the period, partially offset by dividends paid to stockholders and common stock repurchases.

For the three months ended March 31, 2023, common stock repurchases totaled 71,111 shares at an average cost of $23.35 per share, all of which were made in connection with withholding to cover income taxes on the vesting of stock-based compensation.

At March 31, 2023, approximately 1.1 million shares remained eligible for repurchase under the current stock repurchase authorization.

Liquidity and Capital Resources.

Liquidity refers to the Company’s ability to generate adequate amounts of cash to meet financial obligations to its depositors, to fund loans and securities purchases and operating expenses.

Sources of funds include scheduled amortization of loans, loan prepayments, scheduled maturities of unpledged investments, cash flows from mortgage-backed securities and the ability to borrow funds from the FHLBNY and approved broker-dealers.

Sources of funds include scheduled amortization of loans, loan prepayments, scheduled maturities of unpledged investments, cash flows from securities and the ability to borrow funds from the FHLBNY and approved broker-dealers.

Cash flows from loan payments and maturing investment securities are fairly predictable sources of funds.

Changes in interest rates, local economic conditions, 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.

Changes in interest rates, local economic conditions and the competitive marketplace can influence loan prepayments, prepayments on mortgage-backed securities and deposit flows.

For three months ended March 31, 2023 and 2022, loan repayments totaled $826.7 million and $883.1 million, respectively.

As deposits have declined, the Company has continued to monitor and focus on deposit behavior and borrowing capacity with the FHLBNY and FRBNY, with current borrowing capacity of $1.28 billion and $1.45 billion, respectively at March 31, 2023.

Our estimated uninsured and uncollateralized deposits at March 31, 2023 totaled $2.77 billion, which does not consider all of the benefit of different account titling conventions that may increase the insured balance for a particular account.

At March 31, 2023, Provident Bank held on balance sheet liquidity and borrowing capacity totaling $3.59 billion, representing 130% of estimated uninsured and uncollateralized deposits.

All borrowing capacity is immediately available.

The Bank established the Bank Term Funding Program with the Federal Reserve Bank of New York in March and pledged approximately $521 million in unencumbered security collateral to the facility improving its access to immediate funding.

Advances under the Program can be requested until March 11, 2024.

As of March 31, 2023, the Company has not taken any advances under the Program, but has this option as an available short term liquidity source.

As of March 31, 2023 our ICS deposits totaled $198.8 million, compared to $58.9 million at December 31, 2022.

The Federal Deposit Insurance Corporation ("FDIC") and the other federal bank regulatory agencies issued a final rule that revised the leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act, that were effective January 1, 2015.

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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.

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.

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In connection with its adoption of CECL on January 1, 2020, the Company elected to utilize the five-year CECL transition.

At September 30, 2022, the Bank and the Company exceeded all current minimum regulatory capital requirements as follows:

September 30, 2022

At March 31, 2023, the Bank and the Company exceeded all current minimum regulatory capital requirements as follows:

March 31, 2023

Required Required with Capital Conservation Buffer Actual

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and a total risk-based capital ratio of at least 10.00%.

COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

The Company reported net income of $43.4 million, or $0.58 per basic and diluted share for the three months ended September 30, 2022, compared to net income of $37.3 million, or $0.49 per basic and diluted share, for the three months ended September 30, 2021.

For the nine months ended September 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 ended September 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 on September 27, 2022.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

The Company reported net income of $40.5 million, or $0.54 per basic and diluted share for the three months ended March 31, 2023, compared to net income of $44.0 million, or $0.58 per basic and diluted share for the three months ended March 31, 2022.

Net income for the three months ended March 31, 2023 was negatively impacted by an increase in funding costs, an increase in the provision for credit losses due to a worsened economic forecast and an increase in non-interest expense attributable to increases in compensation and benefits expense and the increased cost of FDIC insurance, partially offset by an increase in non-interest income.

Non-tax deductible transaction costs related to our pending merger with Lakeland Bancorp, Inc.

(“Lakeland”) totaled $1.1 million in the current quarter, compared to $1.2 million for the trailing quarter.

Net Interest Income.

Total net interest income increased $18.3 million to $109.5 million for the three months ended September 30, 2022, from $91.2 million for the three months ended September 30, 2021.

For the nine months ended September 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 ended September 30, 2022 increased $22.1 million to $121.7 million, from $99.6 million for the same period in 2021.

For the nine months ended September 30, 2022, interest income increased $28.3 million to $329.0 million, from $300.7 million for the nine months ended September 30, 2021.

Interest expense increased $3.9 million to $12.2 million for the three months ended September 30, 2022, from $8.4 million for the three months ended September 30, 2021.

For the nine months ended September 30, 2022, interest expense decreased $3.0 million to $25.5 million, from $28.5 million for the nine months ended September 30, 2021.

The increase in net interest income for the three months ended September 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 ended September 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 ended September 30, 2021.

The increase in net interest income for the nine months ended September 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 ended September 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 ended September 30, 2021.

The net interest margin increased 57 basis points to 3.51% for the quarter ended September 30, 2022, compared to 2.94% for the quarter ended September 30, 2021.

The weighted average yield on interest-earning assets increased 69 basis points to 3.90% for the quarter ended September 30, 2022, compared to 3.21% for the quarter ended September 30, 2021, while the weighted average cost of interest bearing liabilities increased 17 basis points for the quarter ended September 30, 2022 to 0.54%, compared to the quarter ended September 30, 2021.

The average cost of interest bearing deposits for the quarter ended

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 ended September 30, 2022, compared to $2.55 billion for the quarter ended September 30, 2021.

The average cost of total deposits, including non-interest bearing deposits, was 0.35% for the quarter ended September 30, 2022, compared with 0.23% for the quarter ended September 30, 2021.

The average cost of borrowed funds for the quarter ended September 30, 2022 was 1.11%, compared to 1.08% for the same period last year.

For the nine months ended September 30, 2022, the net interest margin increased 25 basis points to 3.24%, compared to 2.99% for the nine months ended September 30, 2021.

The weighted average yield on interest earning assets increased 20 basis points to 3.51% for the nine months ended September 30, 2022, compared to 3.31% for the nine months ended September 30, 2021, while the weighted average cost of interest bearing liabilities decreased five basis points to 0.38% for the nine months ended September 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 ended September 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 ended September 30, 2022, compared with $2.47 billion for the nine months ended September 30, 2021.

The average cost of total deposits, including non-interest bearing deposits, was 0.25% for the nine months ended September 30, 2022, compared with 0.26% for the nine months ended September 30, 2021.

The average cost of borrowings for the nine months ended September 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 ended September 30, 2022, from $62.5 million for the three months ended September 30, 2021.

Commercial loan interest income increased $747,000 to $25.2 million for the three months ended September 30, 2022, from $24.5 million for the three months ended September 30, 2021.

Consumer loan interest income increased $440,000 to $3.8 million for the three months ended September 30, 2022, from $3.3 million for the three months ended September 30, 2021.

For the three months ended September 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 ended September 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 ended September 30, 2022, from $187.4 million for the nine months ended September 30, 2021.

Commercial loan interest income decreased $5.4 million to $70.4 million for the nine months ended September 30, 2022, from $75.8 million for the nine months ended September 30, 2021.

Consumer loan interest income increased $19,000 to $10.3 million for the nine months ended September 30, 2022, from $10.2 million for the nine months ended September 30, 2021.

For the nine months ended September 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 ended September 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 ended September 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 ended September 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 ended September 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 ended September 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 ended September 30, 2022, from $5.9 million for the three months ended September 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 ended September 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 ended September 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 ended September 30, 2022.

The average yield on total securities increased to 2.36% for the three months ended September 30, 2022, compared with 1.32% for the same period in 2021.

For the nine months ended September 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 ended September 30, 2022, compared with $6.3 million for the three months ended September 30, 2021.

For the nine months ended September 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 ended September 30, 2022, respectively, from 0.30% and 0.34% for the three and nine months ended September 30, 2021,

respectively.

The average balance of interest bearing core deposits for the three months ended September 30, 2022 increased $13.4 million to $7.42 billion.

For the nine months ended September 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 ended September 30, 2022, from $804.9 million for the three months ended September 30, 2021.

For the nine months ended September 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 ended September 30, 2022, from $1.8 million for the three months ended September 30, 2021.

For the nine months ended September 30, 2022, interest expense on borrowed funds decreased $2.3 million to $4.8 million, from $7.1 million for the nine months ended September 30, 2021.

The average cost of borrowings increased to 1.11% for the three months ended September 30, 2022, from 1.08% for the three months ended September 30, 2021.

The average cost of borrowings decreased to 0.97% for the nine months ended September 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 ended September 30, 2022, from $652.4 million for the three months ended September 30, 2021.

For the nine months ended September 30, 2022, average borrowings decreased $180.9 million to $663.4 million, compared to $844.2 million for the nine months ended September 30, 2021.

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities.

Net interest income depends on the relative amounts of interest-earning assets and interest-bearing liabilities and the rates of interest earned on such assets and paid on such liabilities.

The following table sets forth certain information for the quarters ended March 31, 2023 and March 31, 2022.

For the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities is expressed both in dollars and rates.

No tax equivalent adjustments were made.

Average balances are daily averages.

For the three months ended

March 31, 2023 March 31, 2022

Average Balance Interest Average

Yield/Cost Average Balance Interest Average

(Dollars in Thousands) (Unaudited)

Interest Earning Assets:

Deposits $ 72,022 $ 845 4.76 % $ 274,004 $ 107 0.16 %

Federal funds sold and other short-term investments 29 — 3.70 % 195,598 540 1.12 %

Available for sale debt securities 1,808,619 10,402 2.30 % 2,115,852 7,577 1.43 %

Held to maturity debt securities, net (1)

383,907 2,368 2.47 % 428,125 2,596 2.43 %

Equity securities, at fair value 991 — — % 1,092 — — %

Federal Home Loan Bank stock 59,106 1,028 6.96 % 30,907 374 4.85 %

Total mortgage loans 7,643,140 95,988 5.02 % 7,061,657 63,835 3.62 %

Total commercial loans 2,146,658 28,683 5.37 % 2,099,145 22,821 4.38 %

Total consumer loans 304,058 4,242 5.66 % 321,029 3,139 3.97 %

Total net loans 10,093,856 128,913 5.12 % 9,481,831 89,795 3.80 %

Total interest earning assets $ 12,418,530 $ 143,556 4.63 % $ 12,527,409 $ 100,989 3.23 %

Non-Interest Earning Assets:

Cash and due from banks 142,953 122,856

Other assets 1,171,225 1,043,164

Total assets $ 13,732,708 $ 13,693,429

Interest Bearing Liabilities:

Demand deposits $ 5,771,582 $ 21,920 1.54 % $ 6,288,544 $ 4,195 0.27 %

Savings deposits 1,398,419 453 0.13 % 1,476,643 291 0.08 %

Time deposits 859,773 5,137 2.42 % 680,818 701 0.42 %

Total deposits 8,029,774 27,510 1.39 % 8,446,005 5,187 0.25 %

Borrowed funds 1,224,279 7,476 2.48 % 549,679 1,168 0.86 %

Subordinated debentures 10,511 246 9.51 % 10,301 108 4.27 %

Total interest bearing liabilities $ 9,264,564 35,232 1.54 % $ 9,005,985 6,463 0.29 %

Non-Interest Bearing Liabilities:

Non-interest bearing deposits $ 2,550,796 $ 2,786,042

Other non-interest bearing liabilities 290,978 215,078

Total non-interest bearing liabilities 2,841,774 3,001,120

Total liabilities 12,106,338 12,007,105

Stockholders' equity 1,626,370 1,686,324

Total liabilities and stockholders' equity $ 13,732,708 $ 13,693,429

Net interest income $ 108,324 $ 94,526

Net interest rate spread 3.09 % 2.94 %

Net interest-earning assets $ 3,153,966 $ 3,521,424

Net interest margin (3)

3.48 % 3.02 %

Ratio of interest-earning assets to total interest-bearing liabilities 1.34x 1.39x

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

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

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

Total net interest income increased $13.8 million to $108.3 million for the quarter ended March 31, 2023, from $94.5 million for the quarter ended March 31, 2022.

Interest income for the quarter ended March 31, 2023 increased $42.6 million to $143.6 million, from $101.0 million for the same period in 2022.

Interest expense increased $28.8 million to $35.2 million for the quarter ended March 31, 2023, from $6.5 million for the quarter ended March 31, 2022.

The increase in net interest income for the three months ended March 31, 2023, was primarily driven by an increase in the net interest margin resulting from the favorable repricing of adjustable rate loans, higher market rates on new loan originations and the investment of excess liquidity into higher-yielding loans, partially offset by the unfavorable repricing of both deposits and borrowings and a decrease in lower-costing deposits, which resulted in an increase in borrowings.

Additionally, fees related to the forgiveness of PPP loans, which are recognized in interest income, decreased $1.1 million for the three months ended March 31, 2023, compared to $1.1 million for the three months ended March 31, 2022.

For the three months ended March 31, 2023, the net interest margin increased 46 basis points to 3.48%, compared to 3.02% for the three months ended March 31, 2022.

The weighted average yield on interest earning assets increased 140 basis points to 4.63% for the three months ended March 31, 2023, compared to 3.23% for the three months ended March 31, 2022, while the weighted average cost of interest bearing liabilities increased 125 basis points to 1.54% for the three months ended March 31, 2023, compared to 0.29% for the same period last year.

The average cost of interest bearing deposits increased 114 basis points to 1.39% for the three months ended March 31, 2023, compared to 0.25% for the same period last year.

Average non-interest bearing demand deposits totaled $2.55 billion for the three months ended March 31, 2023, compared with $2.79 billion for the three months ended March 31, 2022.

The average cost of deposits, including non-interest bearing deposits, was 1.05% for the three months ended March 31, 2023, compared with 0.19% for the three months ended March 31, 2022.

The average cost of borrowings for the three months ended March 31, 2023 was 9.51%, compared to 0.86% for the same period last year.

Interest income on loans secured by real estate increased $32.2 million to $96.0 million for the three months ended March 31, 2023, from $63.8 million for the three months ended March 31, 2022.

Commercial loan interest income increased $5.9 million to $28.7 million for the three months ended March 31, 2023, from $22.8 million for the three months ended March 31, 2022.

Consumer loan interest income increased $1.1 million to $4.2 million for the three months ended March 31, 2023, from $3.1 million for the three months ended March 31, 2022.

For the three months ended March 31, 2023, the average balance of total loans increased $612.0 million to $10.09 billion, from $9.48 billion for the same period in 2022.

The average yield on total loans for the three months ended March 31, 2023, increased 132 basis points to 5.12%, from 3.80% for the same period in 2022.

Interest income on held to maturity debt securities decreased $228,000 to $2.4 million for the quarter ended March 31, 2023, compared to the same period last year.

Average held to maturity debt securities decreased $44.2 million to $383.9 million for the quarter ended March 31, 2023, from $428.1 million for the same period last year.

Interest income on available for sale debt securities and FHLBNY stock increased $3.5 million to $11.4 million for the three months ended March 31, 2023, from $8.0 million for the same period last year.

The average balance of available for sale debt securities and FHLBNY stock decreased $279.0 million to $1.87 billion for the three months ended March 31, 2023.

The average yield on total securities increased to 2.52% for the three months ended March 31, 2023, compared with 1.47% for the same period in 2022.

Interest expense on deposit accounts increased $22.3 million to $27.5 million for the quarter ended March 31, 2023, compared with $5.2 million for the quarter ended March 31, 2022.

The average cost of interest bearing deposits increased to 1.39% for the first quarter of 2023, from 0.25% for the three months ended March 31, 2022.

For the three months ended March 31, 2023, average interest bearing core deposits, which consist of total savings and demand deposits, decreased $595.2 million, to $7.17 billion, from $7.77 billion for the same period in 2022.

For the three months ended March 31, 2023, average time deposit account balances increased $179.0 million, to $859.8 million, from $680.8 million for the same period in 2022.

Interest expense on borrowed funds increased $6.3 million to $7.5 million for the quarter ended March 31, 2023, from $1.2 million for the quarter ended March 31, 2022.

The average cost of borrowings increased to 2.48% for the three months ended March 31, 2023, from 0.86% for the three months ended March 31, 2022.

Average borrowings increased $674.6 million to $1.22 billion for the quarter ended March 31, 2023, from $549.7 million for the quarter ended March 31, 2022.

Provision for Credit Losses.

2 unchanged sentences

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 ended September 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 ended September 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 ended September 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.

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 $6.0 million provision for credit losses on loans for the three months ended March 31, 2023 compared with a benefit of $6.4 million for the three months ended March 31, 2022.

The increase in provision was attributable to a worsening economic forecast and related deterioration in the projected commercial property price index over the expected life of the loan portfolio.

Non-Interest Income.

Non-interest income totaled $28.4 million for the quarter ended September 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 ended September 30, 2022, compared to the quarter ended September 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 of Tirschwell & Loewy, Inc.

Additionally, insurance agency income increased $432,000 to $2.9 million for the three months ended September 30, 2022, compared to the quarter ended September 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 ended September 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 ended September 30, 2021, to $1.2 million for the three months ended September 30, 2022, primarily due to a benefit claim recognized in the prior year.

For the nine months ended September 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 ended September 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 ended September 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 ended September 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 ended September 30, 2022, compared to the same period in 2021, primarily due to a decrease in the market

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 ended September 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 beginning July 1, 2021, partially offset by an increase in deposit related fees.

Non-interest income totaled $22.2 million for the quarter ended March 31, 2023, an increase of $2.0 million, compared to the same period in 2022.

Other income increased $2.1 million to $3.3 million for the three months ended March 31, 2023, compared to $1.2 million for the same period in 2022, mainly due to an additional $2.0 million gain recognized from the September 2022 sale of a foreclosed commercial property, representing additional sale proceeds held in escrow pending the resolution of certain post-closing conditions, combined with an increase in the gains on sale of SBA loans, partially offset by a decrease in net fees on loan-level interest rate swap transactions.

Insurance agency income increased $682,000 to $4.1 million for the three months ended March 31, 2023, compared to the same period in 2022, resulting from an increase in business activity.

BOLI income increased $305,000 to $1.5 million, for the three months ended March 31, 2023, compared to the same period in 2022, primarily due to higher equity valuations.

Partially offsetting these increases in non-interest income, wealth management income decreased $551,000 to $6.9 million for the three months ended March 31, 2023, compared to the same period in 2022, primarily due to a decrease in the market value of assets under management, while fee income decreased $502,000 to $6.4 million for the three months ended March 31, 2023, compared to the same period in 2022, primarily due to a decrease in commercial loan prepayment fees.

Non-Interest Expense.

For the three months ended September 30, 2022, non-interest expense totaled $69.4 million, an increase of $6.0 million, compared to the three months ended September 30, 2021.

Other operating expenses increased $3.3 million to $12.2 million for the three months ended September 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 ended September 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 ended September 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 ended September 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 ended September 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 ended September 30, 2022, an increase of $7.2 million, compared to $188.0 million for the nine months ended September 30, 2021.

Compensation and benefits expense increased $4.8 million to $112.6 million for the nine months ended September 30, 2022, compared to $107.7 million for the nine months ended September 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 ended September 30, 2022, compared to $28.0 million for the nine months ended September 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 ended September 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 ended September 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 ended September 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.

For the three months ended March 31, 2023, non-interest expense totaled $69.5 million, an increase of $7.6 million, compared to the three months ended March 31, 2022.

Non-interest expense for the current quarter included $1.1 million in professional fees related to our pending merger with Lakeland.

For the three months ended March 31, 2023, the Company recorded a $739,000 provision for credit losses for off-balance sheet credit exposures, compared to a $2.4 million negative provision for the same period in 2022.

The $3.1 million increase in provision was primarily due to the period over period decrease in line of credit utilization and an increase in projected loss factors as a result of a worsened economic forecast.

Other operating expenses increased $2.8 million to $12.2 million for the three months ended March 31, 2023, compared to the same period in 2022, largely due to increases professional fees related to our pending merger with Lakeland, combined with additional expenses related to foreclosed commercial real estate owned properties.

Compensation and benefits expense increased $1.7 million to $38.7 million for the three months ended March 31, 2023, compared to $37.1 million for the three months ended March 31, 2022, primarily due to an increase in stock-based compensation and an increase in salary expense associated with Company-wide annual merit increases.

In addition, FDIC insurance increased $732,000 to $1.9 million for the three months ended March 31, 2023, compared to the same period in 2022, primarily due to the recent FDIC action to increase deposit insurance assessment rates uniformly beginning in the first quarter of 2023.

Partially offsetting these increases in non-interest expense, net occupancy expense decreased $920,000 to $8.4 million for the three months ended March 31, 2023, largely due to decreases in snow removal costs and rent expense.

Income Tax Expense.

For the three months ended September 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 ended September 30, 2021.

The increase in tax expense for the three months ended September 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 ended September 30, 2022, compared with the three months ended September 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 ended September 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 ended September 30, 2021.

The increase in tax expense for the nine months ended September 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 ended September 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.

For the three months ended March 31, 2023, the Company’s income tax expense was $14.5 million with an effective tax rate of 26.3%, compared with income tax expense of $15.2 million with an effective tax rate of 25.7% for the three months ended March 31, 2022.

The decrease in tax expense for the three months ended March 31, 2023, 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 was primarily due to non-deductible merger related transaction costs incurred in the 2023 period.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis