LAKELAND BANCORP, INC. This section should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Annual Report on Form 10-K for the year ended
Note Regarding Forward Looking Statements
The information disclosed in this document includes various forward-looking
statements that are made in reliance upon the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 with respect to credit quality
(including delinquency trends and the allowance for credit losses), corporate
objectives and other financial and business matters. The words "anticipates,"
"projects," "intends," "estimates," "expects," "believes," "plans," "may,"
"will," "should," "could" and other similar expressions are intended to identify
such forward-looking statements. The Company cautions that these forward-looking
statements are necessarily speculative and speak only as of the date made, and
are subject to numerous assumptions, risks and uncertainties, all of which may
change over time. Actual results could differ materially from such
forward-looking statements. Accordingly, you should not put undue reliance on
forward-looking statements.
In addition to the risk factors disclosed elsewhere in this document and in the
Company's most recently filed Annual Report on Form 10-K, as updated by the
Company's subsequent Quarterly Reports on Form 10-Q and Current Reports on Form
8-K, the following factors, among others, could cause the Company's actual
results to differ materially and adversely from such forward-looking statements:
changes in the financial services industry and the U.S. and global capital
markets; changes in economic conditions nationally, regionally and in the
Company's markets; the ongoing COVID-19 outbreak and its effects on economic
activity; government responses to the COVID-19 pandemic; the nature and timing
of actions of the Federal Reserve Board and other regulators; the nature and
timing of legislation affecting the financial services industry; changes in
federal and state tax laws; government intervention in the U.S. financial
system; changes in levels of inflation and market interest rates, which may
affect demand for our products and the value of our financial instruments;
pricing pressures on loan and deposit products; credit risks of Lakeland's
lending activities; successful implementation, deployment and upgrades of new
and existing technology, systems, services and products; customers' acceptance
of Lakeland's products and services; failure to realize anticipated efficiencies
and synergies from the merger of 1st Constitution Bancorp into Lakeland Bancorp
and the merger of 1st Constitution Bank into Lakeland Bank ; and expenses related
to our proposed merger with Provident Financial Services, Inc. ("Provident"),
unexpected delays related to the merger, inability to obtain regulatory
approvals or satisfy other closing conditions required to complete the merger,
and failure to realize anticipated efficiencies and synergies from the merger.
The above-listed risk factors are not exhaustive, particularly as to possible
future events, and new risk factors may emerge from time to time. Certain events
may occur that could cause the Company's actual results to be materially
different than those described in the Company's periodic filings with the
Securities and Exchange Commission . Any statements made by the Company that are
not historical facts should be considered to be forward-looking statements. The
Company is not obligated to update and does not undertake to update any of its
forward-looking statements made herein.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company and its subsidiaries
conform to U.S. generally accepted accounting principles and predominant
practices within the banking industry. The consolidated financial statements
include the accounts of the Company, Lakeland and its subsidiaries, including
Lakeland NJ Investment Corp. , Lakeland Investment Corp. , Lakeland Equity, Inc. ,
Lakeland Preferred Equity, Inc. , 1st Constitution Investment Company of New
Jersey, Inc. and 1st Constitution Real Estate Corporation . All intercompany
balances and transactions have been eliminated.
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. These estimates and assumptions also affect reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates. There have been no material changes in the Company's
critical accounting policies, judgments and estimates, including assumptions or
estimation techniques utilized, as compared to those disclosed in the Company's
most recent Annual Report on Form 10-K.
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Table of Contents Executive Summary OnJanuary 6, 2022 , the Company completed its acquisition of 1stConstitution with 1stConstitution merging intoLakeland Bancorp and 1stConstitution's wholly-owned subsidiary,1st Constitution Bank , merging intoLakeland Bank . The merger added$1.97 billion in total assets including$1.10 billion in total loans and$1.65 billion in total deposits.Goodwill totaled$115.6 million and core deposit intangibles were$9.0 million . The acquisition represents a significant addition to Lakeland'sNew Jersey franchise and the consolidated organization totals over$10 billion in assets. Full systems integration was completed inFebruary 2022 . The Company's financial statements reflect the impact of the merger from the date of acquisition, which should be considered when comparing periods. For additional information on the fair value of the acquired assets of 1stConstitution , please see Note 2 of the Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q. OnSeptember 27, 2022 , the Company and Provident announced that they had entered into a definitive merger agreement pursuant to which the companies will combine in an all-stock merger, valued at approximately$1.3 billion . The merger combines two complementary banking platforms into a company that will have more than$25 billion in assets,$18 billion in total loans and$20 billion in total deposits. Financial Overview For the third quarter of 2022, the Company reported net income of$28.7 million and earnings per diluted share of$0.44 compared to net income of$22.3 million and earnings per diluted share of$0.43 for the third quarter of 2021. For the third quarter of 2022, annualized return on average assets was 1.10%, annualized return on average common equity was 10.33% and annualized return on average tangible common equity was 13.87% compared to 1.10%, 10.94%, and 13.63%, respectively, for the third quarter of 2021. For the nine months endedSeptember 30, 2022 , the Company reported net income of$73.8 million , compared to$72.9 million for the same period in 2021. For the nine months endedSeptember 30, 2022 , the Company reported earnings per diluted share of$1.13 compared to$1.42 earnings per diluted share reported for the first nine months of 2021. For the first nine months of 2022, annualized return on average assets was 0.96%, annualized return on average common equity was 8.99%, and annualized return on average tangible common equity was 12.08% compared to 1.24%, 12.39% and 15.53%, respectively, for the same period in 2021. Net interest income increased by$20.9 million and$55.2 million for the three and nine months endedSeptember 30, 2022 when compared to the same periods in 2021. Net interest margin for the third quarter of 2022 of 3.28% increased 18 basis points compared to the third quarter of 2021 and decreased 10 basis points compared to the linked second quarter of 2022. Net interest margin for the nine months endedSeptember 30, 2022 was 3.23% as compared to 3.19% for the same period in 2021. The increase in net interest margin compared to the third quarter of 2021 and the year-to-date periods was due primarily to an increase in the volume of interest-earning assets and an increase in yields on interest-earning assets offset by an increase in the cost of interest-bearing liabilities. The Company recorded merger-related expenses of$3.5 million and$1.1 million for the third quarters of 2022 and 2021, respectively, and year-to-date 2022 and 2021 merger-related expenses of$8.1 million and$1.1 million , respectively. Excluding merger-related expenses after tax, third quarter of 2022 net income was$31.6 million or$0.48 diluted EPS, resulting in an annualized return on average assets of 1.21%, annualized return on average common equity of 11.36%, and annualized return on average tangible common equity of 15.25%. Net income, excluding merger-related expenses after tax, for the nine months endedSeptember 30, 2022 was$80.2 million or$1.23 diluted EPS, resulting in an annualized return on average assets of 1.05%, annualized return on average common equity of 9.78%, and annualized return on average tangible common equity of 13.13%. See the non-GAAP Reconciliation of Net Income table below. Total loans, net of deferred fees, increased$1.59 billion to$7.57 billion during the first nine months of 2022 and included loans totaling$1.10 billion acquired in the Company's acquisition of 1stConstitution . Total deposits increased$1.71 billion , or 25%, during the first nine months of 2022, to$8.68 billion and includes deposits of$1.65 billion acquired from 1stConstitution . 41
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Comparison of Operating Results for the Three Months Ended
and 2021
Net Income
Net income was $28.7 million or $0.44 per diluted share, for the third quarter
of 2022 compared to net income of $22.3 million or $0.43 per diluted share, for
the third quarter of 2021. The increase in net income compared to the third
quarter of 2021 was due primarily to an increase of $20.9 million in net
interest income, partially offset by an increase in noninterest expense of $10.6
million and a provision for credit losses of $1.4 million , which compared to a
negative provision of $2.7 million recorded in the third quarter of 2021.
Net Interest Income
Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets. The Company's net interest income is determined by: (i) the volume of interest-earning assets that it holds and the yields that it earns on those assets, and (ii) the volume of interest-bearing liabilities that it has assumed and the rates that it pays on those liabilities. Net interest income on a tax equivalent basis for the third quarter of 2022 was$80.7 million , compared to$59.5 million for the third quarter of 2021. The net interest margin increased 18 basis points to 3.28% in the third quarter of 2022 from 3.10% in the third quarter of 2021. The increase in net interest income compared to the third quarter of 2021 was due primarily to the growth of loans and investment securities. 42
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The following table reflects the components of the Company's net interest income, setting forth for the periods presented, (1) average assets, liabilities and stockholders' equity, (2) interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) the Company's net interest spread (i.e., the average yield on interest-earning assets less the average cost of interest-bearing liabilities) and (5) the Company's net interest margin. Rates for the three months endedSeptember 30, 2022 andSeptember 30, 2021 are computed on a tax equivalent basis using a tax rate of 21%. For the Three Months Ended September 30, 2022 For the Three Months Ended September 30, 2021 Average Average Interest Rates Interest Rates Average Income/ Earned/ Average Income/ Earned/ (dollars in thousands) Balance Expense Paid Balance Expense Paid Assets Interest-earning assets: Loans (1)$ 7,517,878 $ 84,924 4.43 %$ 5,943,698 $ 59,957 4.00 % Taxable investment securities and other 1,806,894 9,589 2.12 % 1,005,744 4,232 1.68 % Tax-exempt securities 353,825 1,880 2.12 % 138,612 745 2.15 % Federal funds sold (2) 77,200 429 2.21 % 523,205 161 0.12 % Total interest-earning assets 9,755,797 96,822 3.90 % 7,611,259 65,095 3.40 % Noninterest-earning assets: Allowance for credit losses (69,472) (60,490) Other assets 672,275 519,281 Total Assets$ 10,358,600 $ 8,070,050 Liabilities and Stockholders' Equity Interest-bearing liabilities: Savings accounts$ 1,092,222 $ 696 0.25 %$ 653,840 $ 85 0.05 % Interest-bearing transaction accounts 4,337,559 10,634 0.97 % 3,701,676 2,775 0.30 % Time deposits 905,735 2,288 1.00 % 826,831 1,127 0.55 % Federal funds purchased 116,685 669 2.24 % - - - % Securities sold under agreements to repurchase 124,043 48 0.15 % 108,519 19 0.07 % Long-term borrowings 219,082 1,807 3.23 % 162,216 1,594 3.85 % Total interest-bearing liabilities 6,795,326 16,142 0.94 % 5,453,082 5,600 0.41 % Noninterest-bearing liabilities: Demand deposits 2,325,391 1,702,788 Other liabilities 133,738 106,224 Stockholders' equity 1,104,145 807,956 Total Liabilities and Stockholders' Equity$ 10,358,600 $ 8,070,050 Net interest income/spread 80,680 2.96 % 59,495 2.99 % Tax equivalent basis adjustment 395 157 Net Interest Income$ 80,285 $ 59,338 Net interest margin (3) 3.28 % 3.10 % (1)Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees. (2)Includes interest-bearing cash accounts. (3)Net interest income divided by interest-earning assets. 43
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Interest income on a tax equivalent basis increased$31.7 million to$96.8 million in the third quarter of 2022 from$65.1 million in the third quarter of 2021. Average loans increased$1.57 billion to$7.52 billion in the third quarter of 2022 compared to$5.94 billion in the third quarter of 2021, due primarily to the acquisition of 1stConstitution . The yield earned on loans increased by 43 basis points to 4.43% in the third quarter of 2022 from the third quarter of 2021 due primarily to the increase in market rates. Total average taxable investment securities increased$801.2 million to$1.81 billion for the third quarter of 2022 from the third quarter of 2021, while average tax-exempt securities increased$215.2 million to$353.8 million for the same periods, due to the acquisition of 1stConstitution and purchases of investment securities. The yield on average taxable investment securities increased 44 basis points from the third quarter of 2021 to 2.12% for the third quarter of 2022, while the yield on average tax-exempt investment securities decreased three basis points to 2.12% due to declines in market conditions during the period and an increase in bond anticipation note purchases at lower rates. Average federal funds sold in the third quarter of 2022 decreased$446.0 million compared to the third quarter of 2021, while the yield increased 209 basis points to 2.21% for the third quarter of 2022 as short-term market rates have risen in 2022. Total interest expense of$16.1 million in the third quarter of 2022 increased by$10.5 million from the$5.6 million reported for the same period in 2021. The cost of average interest-bearing liabilities increased from 0.41% in the third quarter of 2021 to 0.94% in the third quarter of 2022, largely driven by increases in interest-bearing deposit costs offset by a reduction in the cost of long-term borrowings on the Company's subordinated notes. Total interest-bearing deposits increased by$1.15 billion from the third quarter of 2021 to$6.34 billion , while the cost of interest-bearing deposits increased 55 basis points. For the third quarter of 2022, savings and interest-bearing transaction account average balances increased$438.4 million and$635.9 million , respectively, when compared to the same period in 2021, and average time deposits increased$78.9 million . Additionally, inSeptember 2021 the Company issued$150.0 million Fixed-to-Floating Rate Subordinated Notes at a fixed rate of 2.875% and redeemed$75.0 million of its outstanding 5.125% Fixed-to-Floating Rate Subordinated Notes, which contributed to a decrease in the average cost of long-term borrowings of 62 basis points, to 3.23% in the third quarter of 2022 from 3.85% in the third quarter of 2021.
Provision for Credit Losses
In determining the allowance for credit losses on investments, loans and off-balance-sheet credit exposures, management measures expected credit losses based on relevant information about past events, current conditions, reasonable and supportable forecasts, prepayments and future economic conditions. The key assumptions of the methodology include the lookback periods, historic net charge-off factors, economic forecasts, reversion periods, prepayments and qualitative adjustments. The Company uses its best judgment to assess economic conditions and loss data in estimating the allowance for credit losses. In the third quarter of 2022, a$1.4 million provision for credit losses was recorded, compared to a$2.7 million benefit for credit losses for the same period last year. The provision is comprised of a provision for credit losses on loans of$11,000 , a provision for credit losses on securities of$1.3 million and a provision on off-balance-sheet exposures of$22,000 . The slight increase in the provision for credit losses on loans was primarily due to an increase in loan balances, which was largely offset by a decrease in the specific reserves for individually evaluated loans. The provision for credit losses on securities during the third quarter of 2022 was primarily due to increased unrealized losses on lower credit rated securities within our portfolio resulting from a rise in market interest rates. The Company recorded loan charge-offs of$56,000 and recoveries on loans of$88,000 in the third quarter of 2022 compared to loan charge-offs of$996,000 and loan recoveries of$1.3 million in the third quarter of 2021. For more information, see Note 6 in Notes to the Consolidated Statements in this Form 10-Q.
Noninterest Income
Noninterest income increased$1.8 million to$7.2 million for the third quarter of 2022 compared to$5.5 million during the same period in 2021. BOLI income increased$823,000 from the third quarter of 2021 due primarily to death benefits received during the third quarter of 2022. Commissions and fees increased$603,000 from the third quarter of 2021 due primarily to increases in wire transfer charges and financial services income. Service charges on deposit accounts increased$272,000 compared to the second quarter of 2021 due primarily to increases in debit card interchange income. Losses on equity securities totaled$464,000 for the three months endedSeptember 30, 2022 compared to losses of$58,000 in the same period of 2021. The Company recorded swap income in the third quarter of 2022 of$711,000 compared to none in the third quarter of 2021, as changes in the yield curve increased the demand for swap transactions. 44
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Table of Contents Noninterest Expense Noninterest expense in the third quarter of 2022 totaled$47.8 million compared to$37.2 million for the same quarter of 2021, an increase of$10.6 million . Compensation and employee benefits increased$5.2 million to$26.6 million in the third quarter of 2022 due primarily to additions to our staff from the 1stConstitution merger and normal merit increases. The Company recorded merger-related expenses related to the anticipated merger with Provident in the third quarter of 2022 of$3.5 million and merger-related expenses related to the acquisition of 1stConstitution of$1.1 million in the same period in 2021. Premises and equipment expense of$7.6 million and$6.2 million , respectively, was recorded in the three months endedSeptember 30, 2022 and 2021, an increase of$1.4 million due primarily to increases in occupancy expense related to the 1stConstitution branches. Core deposit intangible amortization was$581,000 and$211,000 , for the third quarter of 2022 and 2021, respectively, increasing due to the core deposit intangible recorded on the 1stConstitution acquisition. Other operating expenses, excluding core deposit amortization expense, increased$1.1 million in the third quarter of 2022 compared to the same period in 2021 due primarily to increased consulting fees, appraisal fees, marketing and insurance expense. The Company's efficiency ratio, a non-GAAP financial measure, was 49.76% in the third quarter of 2022, compared to 54.02% for the same period last year. The Company uses this ratio because it believes that the ratio provides a good comparison of period-to-period performance and because the ratio is widely accepted in the banking industry. The following table shows the calculation of the efficiency ratio for the periods presented: For the Three Months Ended September 30, (dollars in thousands) 2022 2021 Total noninterest expense $ 47,811$ 37,207 Less: Amortization of core deposit intangibles 581 211 Merger-related expenses 3,488 1,072 Long term debt extinguishment costs - 831 Noninterest expense, as adjusted $ 43,742$ 35,093 Net interest income $ 80,285$ 59,338 Noninterest income 7,233 5,469 Total revenue 87,518 64,807 Tax-equivalent adjustment on municipal securities 395 157 Total revenue, as adjusted $ 87,913$ 64,964 Efficiency ratio 49.76 % 54.02 % Income Tax Expense The effective tax rate in the third quarter of 2022 was 25.0% compared to 26.4% during the same period in 2021 primarily as a result of tax advantaged items increasing as a percentage of pretax income.
Comparison of Operating Results for the Nine Months Ended
2021
Net Income
Net income was $73.8 million , or $1.13 per diluted share, for the first nine
months of 2022 compared to net income of $72.9 million , or $1.42 per diluted
share, for the first nine months of 2021. Net income increased primarily as a
result of increases of $55.2 million in net interest income and $4.6 million in
noninterest income, partially offset by increases of $37.6 million in
noninterest expense and $22.6 million in provision for credit losses.
Net interest income on a tax equivalent basis for the first nine months of 2022
was $232.1 million , compared to $176.3 million for the first nine months of
2021. The increase in net interest income was due primarily to an increase in
the volume of interest-earning assets and loan yields, offset by an increase in
the cost of interest-bearing deposits. The net interest margin of 3.23% in the
first nine months of 2022 increased from 3.19% for the same period in 2021,
primarily due to the increase in the yield on interest-earning assets. The
components of net interest income are discussed in greater detail below.
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The following table reflects the components of the Company's net interest income, setting forth for the periods presented, (1) average assets, liabilities and stockholders' equity, (2) interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) the Company's net interest spread (i.e., the average yield on interest-earning assets less the average cost of interest-bearing liabilities) and (5) the Company's net interest margin. Rates for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 are computed on a tax equivalent basis using a tax rate of 21%. For the Nine Months Ended September 30, 2022 For the Nine Months Ended September 30, 2021 Average Average Interest Rates Interest Rates Average Income/ Earned/ Average Income/ Earned/ (dollars in thousands) Balance Expense Paid Balance Expense Paid ASSETS Interest-earning assets: Loans (1)$ 7,257,990 $ 229,706 4.18 %$ 6,037,419 $ 179,264 3.97 % Taxable investment securities and other 1,770,121 24,583 1.86 % 942,389 12,242 1.73 % Tax-exempt securities 353,229 5,353 2.02 % 129,434 2,318 2.39 % Federal funds sold (2) 235,742 846 0.48 % 286,936 250 0.12 % Total interest-earning assets 9,617,082 260,488 3.58 % 7,396,178 194,074 3.51 % Noninterest-earning assets: Allowance for credit losses (69,232) (66,641) Other assets 682,682 524,814 TOTAL ASSETS$ 10,230,532 $ 7,854,351 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Savings accounts$ 1,125,580 $ 1,686 0.20 %$ 632,950 $ 247 0.05 % Interest-bearing transaction accounts 4,368,492 16,842 0.51 % 3,529,586 8,447 0.32 % Time deposits 862,958 3,958 0.61 % 916,476 4,655 0.68 % Federal funds purchased 48,473 794 2.16 % 3,040 8 0.36 % Securities sold under agreements to repurchase 110,560 93 0.11 % 86,200 50 0.08 % Long -term borrowings 218,679 5,016 2.06 % 148,616 4,374 2.46 % Total interest-bearing liabilities 6,734,742 28,389 0.56 % 5,316,868 17,781 0.45 % Noninterest-bearing liabilities: Demand deposits 2,277,192 1,637,101 Other liabilities 121,677 113,740 Stockholders' equity 1,096,921 786,642 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$ 10,230,532 $ 7,854,351 Net interest income/spread 232,099 3.02 % 176,293 3.06 % Tax equivalent basis adjustment 1,124 487 NET INTEREST INCOME$ 230,975 $ 175,806 Net interest margin (3) 3.23 % 3.19 % (1)Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees. (2)Includes interest-bearing cash accounts. (3)Net interest income divided by interest-earning assets. 46
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On a tax equivalent basis, interest income increased$66.4 million , or 34%, from$194.1 million in the nine months endedSeptember 30, 2021 , to$260.5 million in the same period of 2022. The increase in interest income was primarily due to growth in the volume and yields of interest-earning assets. Average loans increased$1.22 billion compared to the first nine months of 2021, due to the acquisition of 1stConstitution . The yield on average loans of 4.18% in the nine months endedSeptember 30, 2022 , was 21 basis points higher than the same period in 2021. Average taxable and tax-exempt investment securities increased$827.7 million and$223.8 million , respectively, for the first nine months of 2022 compared to the same period in 2021 due to the acquisition of 1stConstitution and purchases of securities. The yield on average taxable investment securities increased 13 basis points, while the yield on average and tax-exempt investment securities decreased 37 basis points. Average federal funds sold decreased$51.2 million in the first nine months of 2022 compared to the same period in 2021, while the yield on federal funds sold increased 36 basis points. Total interest expense of$28.4 million in the first nine months of 2022 was$10.6 million greater than the interest expense reported for the same period in 2021. Total average interest-bearing liabilities increased$1.42 billion , while the cost of average interest-bearing liabilities increased from 0.45% in the nine months endedSeptember 30, 2021 to 0.56% in the first nine months of 2022. The increase in the balance was due to the acquisition of deposits from 1stConstitution . Rates paid increased in almost all categories of interest-bearing deposits. The cost of long-term borrowings and time deposits decreased by 40 basis points and seven basis points, respectively, while the cost of overnight borrowings increased 180 basis points compared to the first nine months of 2021.
Provision for Credit Losses
In the nine months endedSeptember 30, 2022 , the Company recorded an$11.3 million provision for credit losses compared to an$11.3 million benefit for the same period last year. As ofSeptember 30, 2022 , the provision was comprised of a provision for credit losses on loans of$6.2 million , a provision for credit losses on securities of$4.1 million and a provision for off-balance-sheet exposures of$997,000 . In addition, the Company recorded an initial allowance for credit losses of$12.1 million on purchased credit deteriorated loans acquired from 1stConstitution . The provision for credit losses on loans included a day one provision for the 1stConstitution non-PCD loans of$4.6 million . The benefit for credit losses on loans in the nine months endedSeptember 30, 2021 was comprised of a benefit for credit losses on loans of$10.8 million , a provision for credit losses on securities of$231,000 and a benefit for off-balance-sheet exposures of$707,000 . The increase in the provision recorded for loans and off-balance-sheet exposures in 2022 was due primarily to the provision for non-PCD loans acquired in the 1stConstitution merger and charge-offs for PCD loans. The provision for credit losses on securities during the nine months of 2022 was primarily due to increased unrealized losses on lower credit rated securities within the investment portfolio. The increase in unrealized losses in 2022 was primarily due to the rise in market interest rates, which caused decreases in the fair values of investment securities available for sale. The Company charged off$7.6 million of purchased credit deteriorated loans acquired from 1stConstitution in first nine months of 2022. In addition, other charge-offs totaled$595,000 and recoveries totaled$760,000 in the first nine months of 2022 compared to$4.1 million in charge-offs and$1.8 million in recoveries in the first nine months of 2021. For more information regarding the determination of the provision, see "Risk Elements" below. Noninterest Income The Company recorded noninterest income of$21.1 million in the nine months endedSeptember 30, 2022 , an increase of$4.6 million from$16.5 million in the same period in 2021 due primarily to increases in BOLI income, commissions and fees and service charges on deposit accounts. BOLI income was$3.1 million for the nine months endedSeptember 30, 2022 , an increase of$1.2 million from the 2021 period primarily due to death benefits received during 2022. Commissions and fees increased$1.9 million due primarily to increases in wire transfer charges and financial services income, while service charges on deposit accounts increased$868,000 compared to the first nine months of 2021 due to an increase in debit card income. Gains on sales of loans increased$631,000 driven primarily by an increase in sale volume of residential mortgages due to the 1stConstitution acquisition and swap income increased$476,000 , because changes in the yield curve increased the demand for swap transactions. Losses on equity securities totaled$1.3 million and$191,000 in the nine months endedSeptember 30, 2022 and 2021, respectively. Other income increased$628,000 in 2022 due primarily to reductions in write-downs on premises and recoveries on loans charged off from prior acquisitions. 47
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Table of Contents Noninterest Expense Noninterest expense in the nine months endedSeptember 30, 2022 and 2021 totaled$142.8 million and$105.2 million , respectively, increasing$37.6 million from the prior year. Compensation and employee benefit expense and premises and equipment expense increased$18.9 million and$4.6 million , respectively, compared to the first nine months of 2021 due to the increases in staff and premises from the 1stConstitution acquisition. During the nine months endedSeptember 30, 2022 , the Company recorded merger-related expenses of$8.1 million for the completed acquisition of1st Constitution Bancorp and the anticipated merger with Provident. Other operating expenses increased$6.0 million in the first nine months of 2022 compared to the same period in 2021. Included in the increase in other operating expenses are increases in core deposit intangible amortization, consulting, and marketing expense, which increased$1.1 million ,$707,000 and$833,000 , respectively, compared to the first nine months of 2021. The Company's efficiency ratio, a non-GAAP financial measure, was 52.53% in the first nine months of 2022, compared to 53.24% for the same period in 2021. The Company uses this ratio because it believes that the ratio provides a good comparison of period-to-period performance and because the ratio is widely accepted in the banking industry. The following table shows the calculation of the efficiency ratio for the periods presented: Nine Months Ended September 30, (dollars in thousands) 2022 2021 Total noninterest expense$ 142,838 $ 105,207
Less:
Amortization of core deposit intangibles 1,770 658 Merger-related expenses 8,073 1,072 Long-term debt extinguishment costs - 831 Noninterest expense, as adjusted$ 132,995 $ 102,646 Net interest income$ 230,975 $ 175,806 Noninterest income 21,076 16,497 Total revenue 252,051 192,303 Tax-equivalent adjustment on municipal securities 1,124 487
Less:
Gains on sales of investment securities - 9 Total revenue, as adjusted$ 253,175 $ 192,781 Efficiency ratio 52.53 % 53.24 % Income Tax Expense The effective tax rate in the first nine months of 2022 was 24.7% compared to 25.9% during the same period last year due primarily to tax-advantaged items increasing as a percentage of pretax income resulting from the increase in BOLI and tax exempt securities interest income during the current period.
Financial Condition
The Company's total assets increased$2.32 billion fromDecember 31, 2021 , to$10.52 billion atSeptember 30, 2022 . Total loans, net of deferred fees, were$7.57 billion , an increase of$1.59 billion , or 27% from$5.98 billion atDecember 31, 2021 . Total deposits were$8.68 billion , an increase of$1.71 billion , or 25%, fromDecember 31, 2021 , while total borrowings increased$266.4 million to$576.9 million atSeptember 30, 2022 . With the completion of the 1stConstitution merger inJanuary 2022 , the Company recorded the assets acquired and the liabilities assumed in the acquisition at their estimated fair values as of the acquisition date. Total assets, total loans and total deposits acquired were$1.97 billion ,$1.10 billion and$1.65 billion , respectively. 48
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Table of Contents Loans Lakeland primarily servesNew Jersey , theHudson Valley region inNew York and the surrounding areas. Its equipment finance division serves a broader market with a primary focus on theNortheast United States . Total loans, net of deferred fees, totaled$7.57 billion atSeptember 30, 2022 , an increase of$1.59 billion as compared toDecember 31, 2021 and included$1.10 billion of loans acquired from 1stConstitution . Excluding the impact of the 1stConstitution acquisition, loans increased$497.4 million or 8%. For more information on the loan portfolio, see Note 5 in Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Risk Elements
Commercial loans are placed on a non-accrual status with all accrued interest and unpaid interest reversed if (a) because of the deterioration in the financial position of the borrower, they are maintained on a cash basis (which means payments are applied when and as received rather than on a regularly scheduled basis), (b) payment of all contractual principal and interest is not expected, or (c) principal and interest have been in default for a period of 90 days or more unless the obligation is both well-secured and in process of collection. Residential mortgage loans and closed-end consumer loans are placed on non-accrual status at the time principal and interest have been in default for a period of 90 days or more, except where there exists sufficient collateral to cover the defaulted principal and interest payments, and the loans are well-secured and in the process of collection. Open-end consumer loans secured by real estate are generally placed on non-accrual status and reviewed for charge-off when principal and interest payments are four months in arrears unless the obligations are well-secured and in the process of collection. Interest thereafter on such charged-off consumer loans is taken into income when received only after full recovery of principal. As a general rule, a non-accrual asset may be restored to accrual status when none of its principal or interest is due and unpaid and satisfactory payments have been received for a sustained period (usually six months), or when it otherwise becomes well-secured and in the process of collection. Non-performing assets, including non-accrual PCD loans, increased$1.4 million from$17.0 million atDecember 31, 2021 to$18.4 million atSeptember 30, 2022 . Owner occupied commercial non-accrual loans increased$7.5 million due to one loan, while residential non-accrual loans increased by$1.4 million . Non owner occupied commercial and residential segments decreased by a total of$4.7 million and the commercial, industrial and other segment decreased by$3.1 million as the Company exited several larger loan relationships and received principal paydowns on three other loans. The percentage of non-performing assets to total assets was 0.17% atSeptember 30, 2022 compared to 0.21% atDecember 31, 2021 . Non-accrual loans atSeptember 30, 2022 included three loan relationships with a balance of$1 million or greater, totaling$13.3 million and one loan relationship between$500,000 and$1.0 million , totaling$828,000 . AtSeptember 30, 2022 , there was one loan of$31,000 that was past due more than 89 days and still accruing and atDecember 31, 2021 , one loan with a recorded investment of$1,000 was past due more than 89 days and still accruing. OnSeptember 30, 2022 andDecember 31, 2021 , the Company had$3.1 million and$3.3 million , respectively, in loans that were TDRs and accruing interest income. These loans are expected to be able to perform under the modified terms of the loan. AtSeptember 30, 2022 , the Company had no TDRs that were included in non-accrual loans and atDecember 31, 2021 , there was$127,000 in TDRs that were included in non-accrual loans. AtSeptember 30, 2022 andDecember 31, 2021 , the Company had$73.8 million and$102.3 million , respectively, of loans that were rated substandard that were not classified as non-performing. There were no loans atSeptember 30, 2022 , other than those designated non-performing or substandard, where the Company was aware of any credit conditions of any borrowers or obligors that would indicate a strong possibility of the borrowers not complying with present terms and conditions of repayment and which may result in such loans being included as non-accrual, past due or renegotiated at a future date.
Allowance for credit losses on loans
The Company accounts for the allowance for credit losses using Accounting
Standards Update ("ASU") 2016-13 - Financial Instruments - Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"),
which requires the measurement of expected credit losses for financial assets
measured at amortized cost, including loans and certain off-balance-sheet credit
exposures. Under the standard, the Company's methodology for determining the
allowance for credit losses on loans is based upon key assumptions, including
the lookback periods, historic net charge-off factors, economic forecasts,
reversion periods, prepayments and qualitative adjustments. The allowance is
measured on a collective, or pool, basis when similar risk characteristics
exist. Loans that do not share common risk characteristics are evaluated on an
individual basis and are excluded from the collective evaluation.
The overall balance of the allowance for credit losses on loans of $68.9 million
at September 30, 2022 increased $10.8 million from December 31, 2021 , an
increase of 19% due primarily to a day one PCD allowance of $12.1 million for
the 1st Constitution acquisition offset by charge-offs of 1st Constitution's PCD
loans of $7.6 million . The Company also recorded a provision on 1st
Constitution's non-PCD loans of $4.6 million .
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As of and for the Nine Months Ended As of and for the
September 30, Year Ended
(dollars in thousands) 2022 2021 December 31, 2021
Allowance for credit losses on loans to total
loans outstanding 0.91 % 0.99 % 0.97 %
Allowance for credit losses on loans $ 68,879 $ 57,953 $ 58,047
Total loans outstanding 7,568,826 5,880,802 5,976,148
Non-accrual loans to total loans outstanding 0.24 % 0.21 % 0.28 %
Non-accrual loans $ 18,370 $ 12,248 $ 16,981
Total loans outstanding 7,568,826 5,880,802 5,976,148
Allowance for credit losses on loans to
non-accrual loans 374.95 % 473.16 % 341.83 %
Allowance for credit losses on loans $ 68,879 $ 57,953 $ 58,047
Non-accrual loans 18,370 12,248 16,981
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As of and for the Nine Months Ended As of and for the
September 30, Year Ended
(dollars in thousands) 2022 2021 December 31, 2021Net charge-offs (recoveries) during the period to average loans outstanding: Non-owner occupied commercial
- % 0.13 % 0.10 %
Net charge-offs during the period $ - $ 2,246 $ 2,246
Average amount outstanding 2,757,621 2,360,606 2,347,575
Owner occupied commercial (0.04) % - % - %
Net recoveries during the period $ (313) $ (19) $ (20)
Average amount outstanding 1,095,030 863,693 870,727
Multifamily - % - % - %
Net charge-offs during the period $ - $ 28 $ 28
Average amount outstanding 1,112,123 872,226 889,456
Non owner occupied residential (0.01) % 0.13 % 0.03 %
Net (recoveries) charge-offs during the period $ (14)
$ 194 $ 58 Average amount outstanding 215,445 191,839 188,166 Commercial, industrial and other 0.20 % (0.01) % (0.08) %
Net charge-offs (recoveries) during the period
$ (38) $ (487) Average amount outstanding 655,499 638,771 593,979 Construction 2.28 % (0.01) % (0.01) %
Net charge-offs (recoveries) during the period
$ (17) $ (21) Average amount outstanding 397,371 315,384 312,107 Equipment finance 0.02 % 0.25 % 0.24 % Net charge-offs during the period $ 19$ 225 $ 285 Average amount outstanding 128,657 119,642 120,252 Residential mortgage (0.01) % (0.04) % (0.02) % Net recoveries during the period $ (48)$ (113) $ (64) Average amount outstanding 590,848 390,293 398,141 Consumer 0.01 % (0.08) % 0.05 % Net charge-offs (recoveries) during the period $ 20$ (163) $ 137 Average amount outstanding 302,696 283,938 281,896 Total loans 0.14 % 0.05 % 0.04 % Net charge-offs during the period$ 7,469 $ 2,343 $ 2,162 Average amount outstanding 7,255,290 6,036,392 6,002,299 Non-accrual loans of$18.4 million atSeptember 30, 2022 increased$1.4 million fromDecember 31, 2021 . The allowance for credit losses as a percent of total loans was 0.91% atSeptember 30, 2022 compared to 0.97% atDecember 31, 2021 . The decrease in the allowance for credit losses as a percent of total loans was primarily due to an increase in loans and and continued strength in asset quality. Management believes, based on appraisals and estimated selling costs, that the majority of the Company's non-performing loans are adequately secured and that reserves on its non-performing loans are adequate. Based upon the process employed and giving recognition to all accompanying factors related to the loan portfolio, management considers the allowance for credit losses to be adequate atSeptember 30, 2022 . 51
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Net recoveries as a percentage of average loans outstanding was less than 0.00% in the third quarter of 2022 compared to net recoveries as a percentage of average loans outstanding of 0.02% for the third quarter of 2021. Net charge-offs as a percentage of average loans outstanding was 0.14% and 0.05% for the nine months endedSeptember 30, 2022 and 2021, respectively, with the change predominately related to 1st Constitution PCD loans charged off in the first quarter of 2022.Investment Securities Investment securities increased$414.0 million in the nine months endedSeptember 30, 2022 , including$342.3 million acquired from 1stConstitution , to$2.01 billion atSeptember 30, 2022 compared to$1.59 billion atDecember 31, 2021 , as the Company deployed excess cash. For detailed information on the composition and maturity distribution of the Company's investment securities portfolio, see Note 4 in Notes to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.
Deposits
Total deposits increased from$6.97 billion atDecember 31, 2021 to$8.68 billion atSeptember 30, 2022 , an increase of$1.71 billion , or 25%, including$1.65 billion assumed in the 1stConstitution merger. Excluding the impact of the 1stConstitution acquisition, deposits increased$61.4 million or 1%. Savings and interest-bearing transaction accounts increased$880.6 million due primarily to an increase in interest-bearing checking and savings accounts resulting from the addition of 1stConstitution deposits. Noninterest-bearing deposits increased$556.5 million , including$510.9 million from 1stConstitution , during the nine months endedSeptember 30, 2022 to$2.29 billion .
Liquidity
"Liquidity" measures whether an entity has sufficient cash flow to meet its financial obligations and commitments on a timely basis. The Company is liquid when its subsidiary bank has the cash available to meet the borrowing and cash withdrawal requirements of customers and the Company can pay for current and planned expenditures and satisfy its debt obligations.
Lakeland funds loan demand and operation expenses from several sources:
•Net income. Cash provided by operating activities was
•Deposits. Lakeland can offer new products or change its rate structure in order
to increase deposits. In the first nine months of 2022, Lakeland's deposits
increased
•Sales of investment securities. AtSeptember 30, 2022 the Company had$1.07 billion in securities designated "available for sale." Of these securities,$667.9 million were pledged to secure public deposits and for other purposes required by applicable laws and regulations.
•Principal repayments on loans.
•Credit lines. As a member of the FHLB, Lakeland has the ability to borrow overnight based on the fair value of collateral pledged. Lakeland had$225.0 million of overnight borrowings from the FHLB onSeptember 30, 2022 . Lakeland also has overnight federal funds lines available for it to borrow up to$250.0 million , of which none were outstanding atSeptember 30, 2022 . Lakeland may also borrow from the discount window of theFederal Reserve Bank of New York based on the fair value of collateral pledged. Lakeland had no borrowings with theFederal Reserve Bank of New York as ofSeptember 30, 2022 . •Other borrowings. Lakeland can also generate funds by utilizing long-term debt or securities sold under agreements to repurchase that would be collateralized by security or mortgage collateral. At times, the fair value of securities collateralizing our securities sold under agreements to repurchase may decline due to changes in interest rates and may necessitate our lenders to issue a "margin call" which requires Lakeland to pledge additional collateral to meet that margin call. Management and the Board monitor the Company's liquidity through the Asset/Liability Committee, which monitors the Company's compliance with certain regulatory ratios and other various liquidity guidelines. Management is closely monitoring changes in liquidity needs. The Company has increased collateral and expanded access to additional borrowings should it be necessary in order to meet liquidity needs. While we are unable to predict actual fluctuations in deposit or cash balances, management continues to monitor liquidity and believes that its current level of liquidity is sufficient to meet its current and future operational needs. The cash flow statements for the periods presented provide an indication of the Company's sources and uses of cash, as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statement for the nine months endedSeptember 30, 2022 follows. 52
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Cash and cash equivalents totaling$245.8 million onSeptember 30, 2022 increased$17.2 million fromDecember 31, 2021 . Operating activities provided$98.7 million in net cash. Investing activities used$365.7 million in net cash, primarily due to securities purchases of$412.2 million and loan funding of$487.4 million , partially offset by net cash acquired in the 1stConstitution acquisition of$326.2 million and proceeds from repayments and maturities of investments securities of$220.8 million . Financing activities provided$284.2 million in net cash primarily due to increases of$251.3 million in federal funds purchased and securities sold under agreements to repurchase and$61.8 million in deposits, partially offset by dividends paid of$27.8 million . The Company anticipates that it will have sufficient funds available to meet its current loan commitments and deposit maturities. The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as ofSeptember 30, 2022 . Interest on subordinated debentures and long-term borrowed funds is calculated based on current contractual interest rates. After One After Three Within But Within But Within After (in thousands) Total One Year Three Years Five Years Five Years Minimum annual rentals on noncancellable operating leases$ 33,188 $ 1,265
4,224 422 755 745 2,302
Remaining contractual maturities of
time deposits 1,034,181 810,535 204,758 18,792 96
Subordinated debentures 194,148 - - - 194,148
Loan commitments 1,767,454 1,319,040 191,280 41,216 215,918
Other borrowings 25,000 - 25,000 - -
Interest on other borrowings (1) 70,574 7,010 13,922 13,636 36,006
Standby letters of credit 20,627 19,162 110 - 1,355
Total $ 3,149,396 $ 2,157,434 $ 444,973 $ 80,909 $ 466,080 (1) Includes interest on other borrowings and subordinated debentures at a weighted rate of 3.20%.
Capital Resources
Total stockholders' equity increased to$1.08 billion onSeptember 30, 2022 from$827.0 million onDecember 31, 2021 , an increase of$255.4 million . Book value per common share increased to$16.70 onSeptember 30, 2022 from$16.34 onDecember 31, 2021 . Tangible book value per share decreased from$13.21 per share onDecember 31, 2021 to$12.36 per share onSeptember 30, 2022 , a decrease of 6%, resulting primarily from an increase in goodwill and the number of shares outstanding from the 1stConstitution merger. Please see "Non-GAAP Financial Measures" below. In addition to the equity acquired in the 1stConstitution merger of$285.7 million , the increase in stockholders' equity fromDecember 31, 2021 toSeptember 30, 2022 was due in part to$73.8 million of net income, offset by an other comprehensive loss of$79.0 million and by the payment of cash dividends on common stock of$27.8 million . The Company and Lakeland are subject to various regulatory capital requirements that are monitored by federal banking agencies. Failure to meet minimum capital requirements can lead to certain supervisory actions by regulators; any supervisory action could have a direct material adverse effect on the Company or Lakeland or their financial statements. As ofSeptember 30, 2022 , the Company and Lakeland met all capital adequacy requirements to which they are subject.
As of
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The capital ratios for the Company andLakeland Bank for the periods presented are as follows: Common Equity Tier 1 to Tier 1 Capital to Total Risk-Weighted Assets Tier 1 Capital to Risk- Total Capital to Risk- Average Assets Ratio Ratio Weighted Assets Ratio Weighted Assets RatioSeptember 30, 2022 December 31, 2021 September 30, 2022 December 31, 2021 September 30, 2022 December 31, 2021 September 30, 2022 December 31, 2021 The Company 9.10 % 8.51 % 10.62 % 10.67 % 11.16 % 11.15 % 13.78 % 14.48 %Lakeland Bank 10.01 % 9.70 % 12.29 % 12.71 % 12.29 % 12.71 % 13.12 % 13.67 % Required capital ratios including conservation buffer 4.00 % 4.00 % 7.00 % 7.00 % 8.50 % 8.50 % 10.50 % 10.50 % "Well capitalized" institution underFDIC Regulations 5.00 % 5.00% 6.50 % 6.50% 8.00 % 8.00% 10.00 % 10.00% Non-GAAP Financial Measures Reported amounts are presented in accordance withU.S. GAAP. The Company's management uses certain supplemental non-GAAP information in its analysis of the Company's financial results. Specifically, the Company provides measurements and ratios based on tangible equity and tangible assets. These measures are utilized by regulators and market analysts to evaluate a company's financial condition and therefore, such information is useful to investors. The Company also provides measures based on what it believes are its operating earnings on a consistent basis, and excludes material non-routine operating items which affect the GAAP reporting of results of operations. The Company's management believes that providing this information to analysts and investors allows them to better understand and evaluate the Company's core financial results for the periods in question. These disclosures should not be viewed as a substitute for financial results determined in accordance withU.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies. (dollars in thousands, except share and per share amounts) September 30, 2022 December 31, 2021 Calculation of Tangible Book Value per Common Share Total common stockholders' equity at end of period - GAAP$ 1,082,406 $ 827,014 Less: Goodwill 271,829 156,277 Other identifiable intangible assets, net 9,669 2,420
Total tangible common stockholders' equity at end of period - Non-GAAP
$ 800,908 $ 668,317
Shares outstanding at end of period 64,804 50,606
Book value per share - GAAP $ 16.70 $ 16.34
Tangible book value per share - Non-GAAP $ 12.36 $ 13.21
Calculation of Tangible Common Equity to Tangible Assets Total tangible common stockholders' equity at end of period - Non-GAAP
$ 800,908 $ 668,317
Total assets at end of period$ 10,515,599 $ 8,198,056 Less: Goodwill 271,829 156,277 Other identifiable intangible assets, net 9,669 2,420
Total tangible assets at end of period - Non-GAAP
10.29 % 10.09 %
Tangible common equity to tangible assets - Non-GAAP 7.83 % 8.31 %
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For the Three Months Ended For the Nine Months Ended September
September 30, 30,
(dollars in thousands) 2022 2021 2022 2021Calculation of Return on Average Tangible Common Equity Net income - GAAP
$ 28,746 $ 22,289 $ 73,792 $ 72,871 Total average common stockholders' equity$ 1,104,145 $ 807,956 $ 1,096,936 $ 786,642
Less:
Average goodwill 271,829 156,277 269,713 156,277 Average other identifiable intangible assets, net 9,982 2,758 10,464 2,975
Total average tangible common stockholders' equity - Non-GAAP
$ 822,334 $ 648,921 $ 816,759 $ 627,390 Return on average common stockholders' equity - GAAP 10.33 % 10.94 % 8.99 % 12.39 % Return on average tangible common stockholders' equity - Non-GAAP 13.87 % 13.63 % 12.08 % 15.53 % For the Three Months Ended September 30, For the Nine Months Ended September 30, (Dollars in thousands, except per share amounts) 2022 2021 2022 2021 Calculation of EPS excluding non-routine transactions Net income - GAAP$ 28,746 $ 22,289 $ 73,792 $ 72,871 Non-Routine Transactions: Debt Prepayment Penalty - 831 - 831 Tax deductible merger-related expenses 2,100 500 5,536 500 Tax effect on tax deductible merger-related expenses$ (632) (400) (1,666) (400) Non-tax deductible merger-related expenses 1,388 572 2,538 572 Effect of non-routine transactions, net of tax$ 2,856 $ 1,503 $ 6,408 $ 1,503 Net income available to common shareholders excluding non-routine transactions$ 31,602 $ 23,792 $ 80,200 $ 74,374 Less: Earnings allocated to participating securities 339 303 847 839
Net Income, excluding non-routine transactions
$ 23,489 $ 79,353 $ 73,535 Weighted average shares - Basic 64,842 50,637 64,547$ 50,616 Weighted average shares - Diluted 65,061 50,875 64,755$ 50,837 Basic earnings per share - GAAP$ 0.44 $ 0.43 $ 1.13 $ 1.42 Diluted earnings per share - GAAP$ 0.44 $ 0.43 $ 1.13 $ 1.42 Basic earnings per share, adjusted for non-routine transactions$ 0.48 $ 0.46 $ 1.23 $ 1.45 Diluted earnings per share, adjusted for non-routine transactions$ 0.48 $ 0.46 $ 1.23 $ 1.45
Calculation of return on average assets excluding non-routine transactions
Net Income, excluding non-routine transactions
$ 23,792 $ 80,200 $ 74,374 Average assets 10,358,600 8,070,050 10,230,532 7,854,351 Return on average assets - GAAP 1.10 % 1.10 % 0.96 % 1.24 % Return on average assets, adjusted for non-routine transactions 1.21 % 1.17 % 1.05 % 1.27 % 55
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For the Three Months Ended For the Nine Months Ended September
September 30, 30,
(Dollars in thousands) 2022 2021 2022 2021
Calculation of return on average equity excluding non-routine transactions
Net Income, excluding non-routine transactions
$ 23,792 $ 80,200 $ 74,374 Total average common stockholders' equity 1,104,145 807,956 1,096,936 786,642 Return on average common stockholders' equity - GAAP 10.33 % 10.94 % 8.99 % 12.39 % Return on average common stockholders' equity, adjusted for non-routine transactions 11.36 % 11.68 % 9.78 % 12.64 %
Calculation of return on average tangible common equity excluding non-routine transactions
Net Income, excluding non-routine transactions
$ 23,792 $ 80,200 $ 74,374 Total average tangible common stockholders' equity - Non-GAAP 822,334 648,921 816,744 627,390 Return on average tangible common stockholders' equity - Non-GAAP 13.87 % 13.63 % 12.08 % 15.53 % Return on average tangible common stockholders' equity - Non-GAAP, adjusted for non-routine transactions 15.25 % 14.55 % 13.13 % 15.85 %
Recent Accounting Pronouncements
InJune 2022 , theFinancial Accounting Standards Board ("FASB") issued Update 2022-03, "Fair Value Measurement (Topic 820)" ("ASU 2022-03"). The guidance clarifies the guidance in Topic 820 when measuring the fair value of an equity security subject to contractual restrictions that prohibits the sale of an equity security, amends a related illustrative example, and introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. This ASU will be effective for financial statements issued by public business entities for fiscal years and interim periods beginning afterDecember 15, 2023 . Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Company does not expect ASU 2022-03 to have a material impact on the Company's financial statements. InMarch 2022 , FASB issued Update 2022-02, "Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures" ("ASU 2022-02"). The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross write-offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance is only for entities that have adopted the amendments in Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2022 . Early adoption using prospective application, including adoption in an interim period where the guidance should be applied as of the beginning of the fiscal year. The Company is currently assessing the impact of ASU 2022-02 on its disclosures and control structure; however, the Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements. InOctober 2021 , FASB issued Update 2021-08, an update to Topic 805, Business Combinations. The update provides guidance to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. The amendment provides specific guidance on how to recognize and measure acquired contract assets and contract liabilities from revenue contracts in a business combination. The amendments in this ASU apply to all entities that enter into a business combination within the scope of Subtopic 805-10, Business Combinations - Overall. This ASU will be effective for financial statements issued by public business entities for fiscal years and interim periods beginning afterDecember 15, 2022 . The Company does not expect the ASU to have a material impact on the Company's financial statements. 56
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InMarch 2020 , FASB issued Update 2020-04, an update to Topic 848, Reference Rate Reform. The update provides guidance to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. The update provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met and only applies to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In addition, the update provides optional expedients for applying the requirements of certain Topics or Industry Subtopics in the Codification for contracts that are modified because of reference rate reform and contemporaneous modifications of other contract terms related to the replacement of the reference rate. The ASU allows companies to apply the standard as of the beginning of the interim period that includesMarch 12, 2020 or any date thereafter. The Company is currently assessing the impact to its financial statements; however, the impact is not expected to be material. InDecember 2019 , FASB issued Update 2019-12, an update to Topic 740, Income Taxes, as part of an initiative to reduce complexity in accounting standards for income taxes. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This update is effective for financial statements issued for fiscal years and interim periods beginning afterDecember 15, 2021 with early adoption permitted. The update did not have a material impact on the Company's financial statements.
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