PROVIDENT FINANCIAL SERVICES, INC. Forward-Looking Statements Certain statements contained herein are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "estimate," "project," "intend," "anticipate," "continue," or similar terms or variations on those terms, or the negative of those terms. Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those set forth in Item 1A of the Company's Annual Report on Form 10-K, as supplemented by its Quarterly Reports on Form 10-Q, and those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of theU.S. Government , changes in accounting policies and practices that may be adopted by the regulatory agencies and the accounting standards setters, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset-liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity. In addition, the COVID-19 pandemic continues to have an uncertain impact on the Company, its customers and the communities it serves. Given its ongoing and dynamic nature, including potential variants, it is difficult to predict the continuing impact of the pandemic on the Company's business, financial condition or results of operations. The extent of such impact will depend on future developments, which remain highly uncertain, including when the pandemic will be controlled and abated, and the extent to which the economy can remain open, as well as government responses to the COVID-19 pandemic, including vaccine mandates, which may affect our workforce, human capital resources and infrastructure. As the result of the pandemic and the related adverse local and national economic consequences, the Company could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: the demand for our products and services may decline, making it difficult to grow assets and income; if the economy is unable to remain substantially open, and higher levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; our allowance for credit losses may increase if borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; as the result of the decline in theFederal Reserve Board's target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; our wealth management revenues may decline with continuing market turmoil; we may face the risk of a goodwill write-down due to stock price decline; and our cyber security risks are increased as the result of an increased number of employees working remotely. 51 -------------------------------------------------------------------------------- The Company cautions readers not to place undue reliance on any such forward-looking statements which speak only as of the date made. The Company advises readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not have any obligation to update any forward-looking statements to reflect events or circumstances after the date of this statement. Acquisition SB One Bancorp Acquisition OnJuly 31, 2020 , the Company completed its acquisition ofSB One Bancorp ("SB One"), which added$2.20 billion to total assets,$1.77 billion to total loans and$1.76 billion to total deposits, and added 18 full-service banking offices inNew Jersey andNew York . As part of the acquisition, the addition ofSB One Insurance Agency, Inc. allows the Company to expand its products offerings to its customers to include an array of commercial and personal insurance products. Under the merger agreement, each share of outstanding SB One common stock was exchanged for 1.357 shares of the Company's common stock. The Company issued 12.8 million shares of common stock from treasury stock, plus cash in lieu of fractional shares in the acquisition of SB One. The total consideration paid for the acquisition of SB One was$180.8 million . In connection with the acquisition,SB One Bank , a wholly owned subsidiary of SB One, was merged with and intoProvident Bank , a wholly owned subsidiary of the Company. Critical Accounting Policies The Company considers certain accounting policies to be critically important to the fair presentation of its financial condition and results of operations. These policies require management to make complex judgments on matters which by their nature have elements of uncertainty. The sensitivity of the Company's consolidated financial statements to these critical accounting policies, and the assumptions and estimates applied, could have a significant impact on its financial condition and results of operations. These assumptions, estimates and judgments made by management can be influenced by a number of factors, including the general economic environment. The Company has identified the following as critical accounting policies: •Adequacy of the allowance for credit losses; and •Valuation of deferred tax assets OnJanuary 1, 2020 , the Company adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments," which replaces the incurred loss methodology with the current expected credit loss ("CECL") methodology. It also applies to off-balance sheet credit exposures, including loan commitments and lines of credit. The adoption of the new standard resulted in the Company recording a$7.9 million increase to the allowance for credit losses and a$3.2 million liability for off-balance sheet credit exposures. The adoption of the standard did not result in a change to the Company's results of operations upon adoption as it was recorded as an$8.3 million cumulative effect adjustment, net of income taxes, to retained earnings. The allowance for credit losses is a valuation account that reflects management's evaluation of the current expected credit losses in the loan portfolio. The Company maintains the allowance for credit losses through provisions for credit losses that are charged to income. Charge-offs against the allowance for credit losses are taken on loans where management determines that the collection of loan principal and interest is unlikely. Recoveries made on loans that have been charged-off are credited to the allowance for credit losses. The calculation of the allowance for credit losses is a critical accounting policy of the Company. Management estimates the allowance balance using relevant available information, from internal and external sources, related to past events, current conditions, and a reasonable and supportable forecast. Historical credit loss experience for both the Company and peers provides the basis for the estimation of expected credit losses, where observed credit losses are converted to probability of default rate ("PDR") curves through the use of segment-specific loss given default ("LGD") risk factors that convert default rates to loss severity based on industry-level, observed relationships between the two variables for each segment, primarily due to the nature of the underlying collateral. These risk factors were assessed for reasonableness against the Company's own loss experience and adjusted in certain cases when the relationship between the Company's historical default and loss severity deviate from that of the wider industry. The historical PDR curves, together with corresponding economic conditions, establish a quantitative relationship between economic conditions and loan performance through an economic cycle. Using the historical relationship between economic conditions and loan performance, management's expectation of future loan performance is incorporated using an externally developed economic forecast. This forecast is applied over a period that management has determined to be reasonable and supportable. Beyond the period over which management can develop or source a reasonable and supportable forecast, the model will revert to long-term average economic conditions using a straight-line, time-based methodology. The Company's current forecast period is six quarters, with a four quarter reversion period to 52 -------------------------------------------------------------------------------- historical average macroeconomic factors. The Company's economic forecast is approved by the Company's Asset-Liability Committee. The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics exist. The respective quantitative allowance for each segment is measured using an econometric, discounted PD/LGD modeling methodology in which distinct, segment-specific multi-variate regression models are applied to an external economic forecast. Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and amortized cost basis. Contractual cash flows over the contractual life of the loans are the basis for modeled cash flows, adjusted for modeled defaults and expected prepayments and discounted at the loan-level effective interest rate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring ("TDR") will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date. Qualitative considerations include limitations inherent in the quantitative model; portfolio concentrations that may affect loss experience across one or more components of the portfolio; changes in industry conditions; changes in the Company's loan review process; changes in the Company's loan policies and procedures, economic forecast uncertainty and model imprecision. Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Management developed segments for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation. The segments have been combined or sub-segmented as needed to ensure loans of similar risk profiles are appropriately pooled. As ofSeptember 30, 2021 , the portfolio and class segments for the Company's loan portfolio were: •Mortgage Loans - Residential,Commercial Real Estate , Multi-Family and Construction •Commercial Loans - Commercial Owner Occupied and Commercial Non-Owner Occupied •Consumer Loans - First Lien Home Equity and Other Consumer The allowance for credit losses on loans individually evaluated for impairment is based upon loans that have been identified through the Company's normal loan monitoring process. This process includes the review of delinquent and problem loans at the Company's Delinquency, Credit, Credit Risk Management and Allowance Committees; or which may be identified through the Company's loan review process. Generally, the Company only evaluates loans individually for impairment if the loan is non-accrual, non-homogeneous and the balance is at least$1.0 million , or if the loan was modified as a TDR. For all classes of loans deemed collateral-dependent, the Company estimates expected credit losses based on the fair value of the collateral less any selling costs. If the loan is not collateral dependent, the allowance for credit losses related to individually assessed loans is based on discounted expected cash flows using the loan's initial effective interest rate. A loan for which the terms have been modified resulting in a concession by the Company, and for which the borrower is experiencing financial difficulties is considered to be a TDR. The allowance for credit losses on a TDR is measured using the same method as all other impaired loans, except that the original interest rate is used to discount the expected cash flows, not the rate specified within the restructuring. For loans acquired that have experienced more-than-insignificant deterioration in credit quality since origination are considered PCD loans. The Company evaluates acquired loans for deterioration in credit quality based on any of, but not limited to, the following: (1) non-accrual status; (2) troubled debt restructured designation; (3) risk ratings of special mention, substandard or doubtful; (4) watchlist credits; and (5) delinquency status, including loans that are current on acquisition date, but had been previously delinquent. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. Subsequent to the acquisition date, the initial allowance for credit losses on PCD loans will increase or decrease based on future evaluations, with changes recognized in the provision for credit losses. Management believes the primary risks inherent in the portfolio are a general decline in the economy, a decline in real estate market values, rising unemployment or a protracted period of elevated unemployment, increasing vacancy rates in commercial investment properties and possible increases in interest rates in the absence of economic improvement. As the impact of COVID-19 continues to unfold, 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 53 -------------------------------------------------------------------------------- combination of these events may adversely affect borrowers' ability to repay the loans, resulting in increased delinquencies, credit losses and higher levels of provisions. Management considers it important to maintain the ratio of the allowance for credit losses to total loans at an acceptable level given current and forecasted economic conditions, interest rates and the composition of the portfolio. Although management believes that the Company has established and maintained the allowance for credit losses at appropriate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment and economic forecast. Management evaluates its estimates and assumptions on an ongoing basis giving consideration to forecasted economic factors, historical loss experience and other factors. Such estimates and assumptions are adjusted when facts and circumstances dictate. In addition to the ongoing impact of COVID-19, illiquid credit markets, volatile securities markets, and declines in the housing and commercial real estate markets and the economy in general may increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods. In addition, various regulatory agencies periodically review the adequacy of the Company's allowance for credit losses as an integral part of their examination process. Such agencies may require the Company to recognize additions to the allowance or additional write-downs based on their judgments about information available to them at the time of their examination. Although management uses the best information available, the level of the allowance for credit losses remains an estimate that is subject to significant judgment and short-term change. The CECL approach to calculate the allowance for credit losses on loans is significantly influenced by the composition, characteristics and quality of the Company's loan portfolio, as well as the prevailing economic conditions and forecast utilized. Material changes to these and other relevant factors creates greater volatility to the allowance for credit losses, and therefore, greater volatility to the Company's reported earnings. For the three and nine months endedSeptember 30, 2021 , the changing economic forecasts attributable to COVID-19 and projected economic recovery led to the Company recording either a reduction in, or a negative provision for credit losses, compared to the same periods last year. See Note 4 to the Consolidated Financial Statements and the Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") for more information on the allowance for credit losses on loans. The determination of whether deferred tax assets will be realizable is predicated on the reversal of existing deferred tax liabilities and estimates of future taxable income. Such estimates are subject to management's judgment. A valuation allowance is established when management is unable to conclude that it is more likely than not that it will realize deferred tax assets based on the nature and timing of these items. The Company did not require a valuation allowance atSeptember 30, 2021 orDecember 31, 2020 . COMPARISON OF FINANCIAL CONDITION ATSEPTEMBER 30, 2021 ANDDECEMBER 31, 2020 Total assets atSeptember 30, 2021 were$13.39 billion , a$472.2 million increase fromDecember 31, 2020 . The increase in total assets was primarily due to a$763.9 million increase in total investments, partially offset by a$268.3 million decrease in total loans and a$27.1 million decrease in cash and cash equivalents. The Company's loan portfolio decreased$268.3 million to$9.55 billion atSeptember 30, 2021 , from$9.82 billion atDecember 31, 2020 , despite strong originations, as prepayments, including Paycheck Protection Program ("PPP") loan forgiveness, were elevated. For the nine months endedSeptember 30, 2021 , loan funding, including advances on lines of credit, totaled$2.54 billion , compared with$2.63 billion for the same period in 2020. Originations under PPP programs totaled$208.7 million and$397.8 million for the nine month periods endedSeptember 30, 2021 and 2020, respectively. Total PPP loans outstanding decreased$299.4 million to$173.8 million atSeptember 30, 2021 , from$473.2 million atDecember 31, 2020 . Excluding the net decrease in PPP loans, during the nine months endedSeptember 30, 2021 , the Company experienced net increases in commercial mortgage loans and construction loans of$246.0 million and$143.9 million , respectively, partially offset by net decreases in consumer loans, multi-family loans, residential mortgage loans and commercial loans of$158.8 million ,$104.7 million ,$64.7 million and$34.1 million , respectively. Commercial real estate, commercial and construction loans represented 83.7% of the loan portfolio atSeptember 30, 2021 , compared to 81.8% atDecember 31, 2020 . 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$186.1 million and$99.9 million , respectively, atSeptember 30, 2021 , compared to$218.2 million and$126.6 million , respectively, atDecember 31, 2020 . No SNC relationship were 90 days or more delinquent atSeptember 30, 2021 . The Company had outstanding junior lien mortgages totaling$140.8 million atSeptember 30, 2021 . Of this total, nine loans totaling$440,471 were 90 days or more delinquent with an allowance for credit losses of$12,161 . 54 -------------------------------------------------------------------------------- The following table sets forth information regarding the Company's non-performing assets as ofSeptember 30, 2021 andDecember 31, 2020 (in thousands): September 30, 2021 December 31, 2020 Mortgage loans: Residential $ 7,263 9,315 Commercial 32,619 31,982 Construction 2,967 1,392 Total mortgage loans 43,288 42,689 Commercial loans 21,434 42,118 Consumer loans 1,479 2,283 Total non-performing loans 66,201 87,090 Foreclosed assets 1,619 4,475 Total non-performing assets $ 67,820 91,565 The following table sets forth information regarding the Company's 60-89 day delinquent loans as ofSeptember 30, 2021 andDecember 31, 2020 (in thousands): September 30, 2021 December 31, 2020 Mortgage loans: Residential $ 2,177 8,852 Commercial - 113 Multi-family - 585 Construction - - Total mortgage loans 2,177 9,550 Commercial loans 1,028 1,179 Consumer loans - 4,519 Total 60-89 day delinquent loans $ 3,205
15,248
AtSeptember 30, 2021 , the Company's allowance for credit losses related to the loan portfolio was 0.84% of total loans, compared to 0.85% and 1.03% atJune 30, 2021 andDecember 31, 2020 , respectively. The Company recorded a provision for credit losses on loans of$1.0 million for the three months endedSeptember 30, 2021 and a negative provision for credit losses on loans of$24.7 million for the nine months endedSeptember 30, 2021 , compared with provisions of$6.4 million and$32.0 million for the three and nine months endedSeptember 30, 2020 , respectively. For the three and nine months endedSeptember 30, 2021 , the Company had net charge-offs of$1.9 million and net recoveries of$3.3 million , respectively, compared to net recoveries of$58,000 and net charge-offs of$2.7 million , respectively, for the same periods in 2020. The allowance for credit losses decreased$21.4 million to$80.0 million atSeptember 30, 2021 from$101.5 million atDecember 31, 2020 . The reduction in provision for credit losses for three and nine months endedSeptember 30, 2021 , compared to the same period in the prior year, was primarily the result of an improved economic forecast and the resultant favorable impact on expected credit losses, compared to the prior year where the provision for credit losses was based upon a weak economic forecast and a more uncertain outlook attributable to the COVID-19 pandemic. The net recoveries realized for the nine months endedSeptember 30, 2021 were largely related to a previously charged-off loan which further contributed to the negative provision for credit losses in the period. Total non-performing loans were$66.2 million , or 0.69% of total loans atSeptember 30, 2021 , compared to$87.1 million , or 0.89% of total loans atDecember 31, 2020 . The$20.9 million decrease in non-performing loans consisted of a$20.7 million decrease in non-performing commercial loans, a$2.1 million decrease in non-performing residential mortgage loans and an$804,000 decrease in non-performing consumer loans, partially offset by a$1.6 million increase in non-performing construction loans and a$637,000 increase in non-performing commercial mortgage loans. AtSeptember 30, 2021 andDecember 31, 2020 , the Company held foreclosed assets of$1.6 million and$4.5 million , respectively. During the nine months endedSeptember 30, 2021 , there were three additions to foreclosed assets with an aggregate carrying value of$513,000 , nine properties sold with an aggregate carrying value of$2.3 million and valuation charges of$1.1 million . Foreclosed assets atSeptember 30, 2021 consisted primarily of commercial real estate. Total non-performing assets atSeptember 30, 2021 decreased$23.7 million to$67.8 million , or 0.51% of total assets, from$91.6 million , or 0.71% of total assets atDecember 31, 2020 . 55 -------------------------------------------------------------------------------- Cash and cash equivalents were$505.3 million atSeptember 30, 2021 , a$27.1 million decrease fromDecember 31, 2020 , primarily as a result of decreases in cash collateral pledged to counterparties to secure loan-level swaps, partially offset by an increase in short term investments. Total investments were$2.38 billion atSeptember 30, 2021 , a$763.9 million increase fromDecember 31, 2020 . This increase was primarily due to purchases of mortgage-backed and municipal securities driven by net inflow of deposits and loan repayments, portions of which were attributable to proceeds from PPP loan forgiveness and government stimulus programs. These purchases were partially offset by repayments of mortgage-backed securities, maturities and calls of certain municipal and agency bonds and a decrease in unrealized gains on available for sale debt securities. Total deposits increased$998.8 million during the nine months endedSeptember 30, 2021 , to$10.84 billion . Total savings and demand deposit accounts increased$1.31 billion to$10.06 billion atSeptember 30, 2021 , while total time deposits decreased$313.7 million to$780.5 million atSeptember 30, 2021 . The increase in savings and demand deposits was largely attributable to a$750.2 million increase in interest bearing demand deposits, as the Company shifted$450.0 million fromFederal Home Loan Bank of New York ("FHLB") borrowings into lower-costing brokered demand deposits, a$265.5 million increase in non-interest bearing demand deposits, which partially benefited from deposits retained from activity associated with PPP loans and stimulus funding, a$216.3 million increase in money market deposits and an$80.5 million increase in savings deposits. The decrease in time deposits was primarily due to the outflow of brokered time deposits, combined with additional maturities of longer-term retail time deposits. Borrowed funds decreased$558.6 million during the nine months endedSeptember 30, 2021 , to$617.4 million . The decrease in borrowings for the period was largely due to the maturity and replacement of FHLB borrowings with lower-costing brokered deposits and the net inflow of retail deposits. Borrowed funds represented 4.6% of total assets atSeptember 30, 2021 , a decrease from 9.1% atDecember 31, 2020 . Stockholders' equity increased$59.6 million during the nine months endedSeptember 30, 2021 , to$1.68 billion , primarily due to net income earned for the period, partially offset by dividends paid to stockholders, common stock repurchases and a decrease in unrealized gains on available for sale debt securities. For the three months endedSeptember 30, 2021 , common stock repurchases totaled 628,589 shares at an average cost of$22.04 per share. For the nine months endedSeptember 30, 2021 , common stock repurchases totaled 675,380 shares at an average cost of$22.00 per share, of which 44,078 shares, at an average cost of$21.81 per share, were made in connection with withholding to cover income taxes on the vesting of stock-based compensation. AtSeptember 30, 2021 , approximately 3.4 million shares remained eligible for repurchase under the current stock repurchase authorization. Liquidity and Capital Resources. Liquidity refers to the Company's ability to generate adequate amounts of cash to meet financial obligations to its depositors, to fund loans and securities purchases, deposit outflows and operating expenses. Sources of funds include scheduled amortization of loans, loan prepayments, scheduled maturities of investments, cash flows from mortgage-backed securities and the ability to borrow funds from the FHLBNY and approved broker-dealers. Cash flows from loan payments and maturing investment securities are fairly predictable sources of funds. Changes in interest rates, local economic conditions, COVID-19 and related government response and the competitive marketplace can influence loan prepayments, prepayments on mortgage-backed securities and deposit flows. In response to COVID-19, the Company has escalated the monitoring of deposit behavior, utilization of credit lines, and borrowing capacity with theFHLBNY andFederal Reserve Bank of New York ("FRBNY"), and is enhancing its collateral position with these funding sources. TheFederal Deposit Insurance Corporation ("FDIC") and the other federal bank regulatory agencies issued a final rule that revised the leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by theBasel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act, that were effectiveJanuary 1, 2015 . Among other things, the rule established a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), adopted a uniform minimum leverage capital ratio at 4%, increased the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigned a higher risk weight (150%) to exposures that are more than 90 days past due or are on non-accrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The rule also required unrealized gains and losses on certain "available-for-sale" securities holdings to be included for purposes of calculating regulatory capital unless a one-time opt-out was exercised. The Company exercised the option to exclude unrealized gains and losses from the calculation of regulatory capital. Additional constraints were also imposed on the inclusion in regulatory capital of mortgage-servicing assets, deferred tax assets and minority interests. The rule limits a banking organization's capital distributions and certain discretionary bonus payments if the banking organization does not hold a "capital conservation buffer," of 2.5% in addition to the amount necessary to meet its minimum risk-based capital requirements. 56 -------------------------------------------------------------------------------- In the first quarter of 2020,U.S. federal regulatory authorities issued an interim final rule providing banking institutions that adopt CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five year transition in total). In connection with its adoption of CECL onJanuary 1, 2020 , the Company elected to utilize the five-year CECL transition. AtSeptember 30, 2021 , the Bank and the Company exceeded all current minimum regulatory capital requirements as follows: September 30, 2021 Required with Capital Conservation Required Buffer Actual Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands)
Bank:(1)
Tier 1 leverage capital$ 516,612 4.00 %$ 516,612 4.00 %$ 1,161,620 8.99 % Common equity Tier 1 risk-based capital 480,225 4.50 747,017 7.00 1,161,620 10.89 Tier 1 risk-based capital 640,301 6.00 907,092 8.50 1,161,620 10.89 Total risk-based capital 853,734 8.00 1,120,526 10.50 1,232,679 11.55 Company: Tier 1 leverage capital$ 516,776 4.00 %$ 516,776 4.00 %$ 1,233,402 9.55 % Common equity Tier 1 risk-based capital 480,462 4.50 747,386 7.00 1,220,515 11.43 Tier 1 risk-based capital 640,617 6.00 907,540 8.50 1,233,402 11.55 Total risk-based capital 854,156 8.00 1,121,079 10.50 1,316,823 12.33 (1) Under theFDIC's prompt corrective action provisions, the Bank is considered well capitalized if it has: a leverage (Tier 1) capital ratio of at least 5.00%; a common equity Tier 1 risk-based capital ratio of 6.50%; a Tier 1 risk-based capital ratio of at least 8.00%; and a total risk-based capital ratio of at least 10.00%. COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDEDSEPTEMBER 30, 2021 AND 2020 General. The Company reported net income of$37.3 million , or$0.49 per basic and diluted share for the three months endedSeptember 30, 2021 , compared to net income of$27.1 million , or$0.37 per basic and diluted share for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , the Company reported net income of$130.6 million , or$1.71 per basic share and$1.70 per diluted share, compared to net income of$56.4 million , or$0.84 per basic and diluted share, for the same period last year. Earnings for the three and nine months endedSeptember 30, 2021 were aided by improved economic conditions and resulting lower credit loss allowance requirements, combined with growth in average interest earning assets including assets acquired in theJuly 31, 2020 merger withSB One Bancorp ("SB One") and the investment of increased deposits. For the three months endedSeptember 30, 2021 , the Company recorded a provision for credit losses on loans of$1.0 million , while for the nine months endedSeptember 30, 2021 , the Company recorded a negative provision for credit losses on loans of$24.7 million , compared with provisions of$6.4 million and$32.0 million for the respective 2020 periods. Net Interest Income. Total net interest income increased$9.2 million to$91.2 million for the quarter endedSeptember 30, 2021 , from$82.0 million for the quarter endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , total net interest income increased$48.3 million to$272.1 million , from$223.8 million for the same period in 2020. Interest income for the quarter endedSeptember 30, 2021 increased$6.1 million to$99.6 million , from$93.5 million for the same period in 2020. For the nine months endedSeptember 30, 2021 , interest income increased$37.5 million to$300.7 million , from$263.2 million for the nine months endedSeptember 30, 2020 . Interest expense decreased$3.1 million to$8.4 million for the quarter endedSeptember 30, 2021 , from$11.5 million for the quarter endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , interest expense decreased$10.8 million to$28.5 million , from$39.3 million for the nine months endedSeptember 30, 2020 . The increase in net interest income for both comparative periods was largely attributable to growth in average earning assets resulting from the net assets acquired from SB One, PPP loan originations and growth in the available for sale debt securities portfolio. Both periods were aided by the inflow of lower-costing core deposits, along with an increase in the accelerated recognition of fees related to the forgiveness of PPP loans in 2021. For the three and nine months endedSeptember 30, 2021 , the accelerated accretion of fees related to the forgiveness of PPP loans totaled$2.5 million and$9.3 million , 57 -------------------------------------------------------------------------------- respectively, which were recognized in interest income, compared to$1.4 million and$2.4 million for the three and nine months endedSeptember 30, 2020 . The net interest margin decreased three basis points to 2.94% for the quarter endedSeptember 30, 2021 , compared to 2.97% for the quarter endedSeptember 30, 2020 . The weighted average yield on interest-earning assets decreased 18 basis points to 3.21% for the quarter endedSeptember 30, 2021 , compared to 3.39% for the quarter endedSeptember 30, 2020 , while the weighted average cost of interest bearing liabilities decreased 20 basis points for the quarter endedSeptember 30, 2021 to 0.37%, compared to the third quarter of 2020. The average cost of interest bearing deposits for the quarter endedSeptember 30, 2021 was 0.30%, compared to 0.44% for the same period last year. Average non-interest bearing demand deposits totaled$2.55 billion for the quarter endedSeptember 30, 2021 , compared to$2.21 billion for the quarter endedSeptember 30, 2020 . The average cost of all deposits, including non-interest bearing deposits, was 0.23% for the quarter endedSeptember 30, 2021 , compared with 0.33% for the quarter endedSeptember 30, 2020 . The average cost of borrowed funds for the quarter endedSeptember 30, 2021 was 1.08%, compared to 1.19% for the same period last year. For the nine months endedSeptember 30, 2021 , the net interest margin decreased four basis points to 2.99%, compared to 3.03% for the nine months endedSeptember 30, 2020 . The weighted average yield on interest earning assets declined 25 basis points to 3.31% for the nine months endedSeptember 30, 2021 , compared to 3.56% for the nine months endedSeptember 30, 2020 , while the weighted average cost of interest bearing liabilities decreased 29 basis points to 0.43% for the nine months endedSeptember 30, 2021 , compared to 0.72% for the same period last year. The average cost of interest bearing deposits decreased 24 basis points to 0.34% for the nine months endedSeptember 30, 2021 , compared to 0.58% for the same period last year. Average non-interest bearing demand deposits totaled$2.47 billion for the nine months endedSeptember 30, 2021 , compared with$1.85 billion for the nine months endedSeptember 30, 2020 . The average cost of all deposits, including non-interest bearing deposits, was 0.26% for the nine months endedSeptember 30, 2021 , compared with 0.44% for the nine months endedSeptember 30, 2020 . The average cost of borrowings for the nine months endedSeptember 30, 2021 was 1.13%, compared to 1.42% for the same period last year. Interest income on loans secured by real estate increased$3.6 million to$62.5 million for the three months endedSeptember 30, 2021 , from$58.9 million for the three months endedSeptember 30, 2020 . Commercial loan interest income increased$3.8 million to$24.5 million for the three months endedSeptember 30, 2021 , from$20.6 million for the three months endedSeptember 30, 2020 . Consumer loan interest income decreased$960,000 to$3.3 million for the three months endedSeptember 30, 2021 , from$4.3 million for the three months endedSeptember 30, 2020 . For the three months endedSeptember 30, 2021 , the average balance of total loans increased$507.1 million to$9.44 billion , compared to the same period in 2020, largely due to total loans acquired from theJuly 31, 2020 merger with SB One. The average yield on total loans for the three months endedSeptember 30, 2021 , increased six basis points to 3.77%, from 3.71% for the same period in 2020. Interest income on loans secured by real estate increased$24.7 million to$187.4 million for the nine months endedSeptember 30, 2021 , from$162.6 million for the nine months endedSeptember 30, 2020 . Commercial loan interest income increased$17.5 million to$75.8 million for the nine months endedSeptember 30, 2021 , from$58.2 million for the nine months endedSeptember 30, 2020 . Consumer loan interest income decreased$1.8 million to$10.2 million for the nine months endedSeptember 30, 2021 , from$12.0 million for the nine months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , the average balance of total loans increased$1.65 billion to$9.58 billion , from$7.93 billion for the same period in 2020, primarily due to total loans acquired from theJuly 31, 2020 merger with SB One, and organic growth, including PPP loans. The average yield on total loans for the nine months endedSeptember 30, 2021 , decreased 10 basis points to 3.78%, from 3.88% for the same period in 2020. Interest income on held to maturity debt securities decreased$198,000 to$2.6 million for the quarter endedSeptember 30, 2021 , compared to the same period last year. Average held to maturity debt securities decreased$11.8 million to$432.5 million for the quarter endedSeptember 30, 2021 , from$444.2 million for the same period last year. Interest income on held to maturity debt securities decreased$539,000 to$8.1 million for the nine months endedSeptember 30, 2021 , compared to the same period in 2020. Average held to maturity debt securities decreased$5.6 million to$440.3 million for the nine months endedSeptember 30, 2021 , from$445.9 million for the same period last year. Interest income on available for sale debt securities and FHLBNY stock decreased$444,000 to$5.9 million for the quarter endedSeptember 30, 2021 , from$6.3 million for the quarter endedSeptember 30, 2020 . The average balance of available for sale debt securities and FHLBNY stock increased$519.5 million to$1.68 billion for the three months endedSeptember 30, 2021 , compared to the same period in 2020. Interest income on available for sale debt securities and FHLBNY stock decreased$2.5 million to$17.2 million for the nine months endedSeptember 30, 2021 , from$19.7 million for the same period last year. The average balance of available for sale debt securities and FHLBNY stock increased$355.0 million to$1.44 billion for the nine months endedSeptember 30, 2021 . 58 -------------------------------------------------------------------------------- The average yield on total securities decreased to 1.32% for the three months endedSeptember 30, 2021 , compared with 2.12% for the same period in 2020. For the nine months endedSeptember 30, 2021 , the average yield on total securities decreased to 1.47%, compared with 2.31% for the same period in 2020. Interest expense on deposit accounts decreased$1.1 million to$6.3 million for the quarter endedSeptember 30, 2021 , compared with$7.4 million for the quarter endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , interest expense on deposit accounts decreased$5.5 million to$20.5 million , from$26.0 million for the same period last year. The average cost of interest bearing deposits decreased to 0.30% for the third quarter of 2021 and 0.34% for the nine months endedSeptember 30, 2021 , from 0.44% and 0.58% for the three and nine months endedSeptember 30, 2020 , respectively. The average balance of interest bearing core deposits for the quarter endedSeptember 30, 2021 increased$1.63 billion to$7.41 billion . For the nine months endedSeptember 30, 2021 , average interest bearing core deposits increased$1.81 billion , to$7.06 billion , from$5.25 billion for the same period in 2020. The increase in average core deposits for both the three and nine months endedSeptember 30, 2021 was largely due to deposits acquired from SB One, combined with organic growth, activity associated with PPP loans and government stimulus. Average time deposit account balances decreased$152.6 million , to$804.9 million for the quarter endedSeptember 30, 2021 , from$957.5 million for the quarter endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , average time deposit account balances increased$135.5 million , to$914.3 million , from$778.8 million for the same period in 2020. Interest expense on borrowed funds decreased$2.1 million to$1.8 million for the quarter endedSeptember 30, 2021 , from$3.9 million for the quarter endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , interest expense on borrowed funds decreased$6.0 million to$7.1 million , from$13.1 million for the nine months endedSeptember 30, 2020 . The average cost of borrowings decreased to 1.08% for the three months endedSeptember 30, 2021 , from 1.19% for the three months endedSeptember 30, 2020 . The average cost of borrowings decreased to 1.13% for the nine months endedSeptember 30, 2021 , from 1.42% for the same period last year. Average borrowings decreased$640.2 million to$652.4 million for the quarter endedSeptember 30, 2021 , from$1.29 billion for the quarter endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , average borrowings decreased$389.3 million to$844.2 million , compared to$1.23 billion for the nine months endedSeptember 30, 2020 . Provision for Credit Losses. Provisions for credit losses are charged to operations in order to maintain the allowance for credit losses at a level management considers necessary to absorb projected credit losses that may arise over the expected term of each loan in the portfolio. In determining the level of the allowance for credit losses, management estimates the allowance balance using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. The amount of the allowance is based on estimates, and the ultimate losses may vary from such estimates as more information becomes available or later events change. Management assesses the adequacy of the allowance for credit losses on a quarterly basis and makes provisions for credit losses, if necessary, in order to maintain the valuation of the allowance. The Company recorded a$1.0 million provision for credit losses on loans for the three months endedSeptember 30, 2021 and a$24.7 million negative provision for credit losses for the nine months endedSeptember 30, 2021 , compared with provisions of$6.4 million and$32.0 million for the three and nine months endedSeptember 30, 2020 , respectively. The reduction in provision for credit losses for three and nine months endedSeptember 30, 2021 , compared to the same period in the prior year, was primarily the result of improved asset quality, an improved economic forecast and the resultant favorable impact on expected credit losses, compared to the prior year where the provision for credit losses was based upon a weak economic forecast and a more uncertain outlook attributable to the COVID-19 pandemic. The net recoveries realized for the nine months endedSeptember 30, 2021 further contributed to the negative provision for credit losses in the period. Non-Interest Income. Non-interest income totaled$23.4 million for the quarter endedSeptember 30, 2021 , an increase of$2.7 million , compared to the same period in 2020. Fee income increased$1.2 million to$7.0 million for the three months endedSeptember 30, 2021 , compared to the same period in 2020, largely due to a$1.2 million increase in commercial loan prepayment fees, a$455,000 increase in deposit related fees and a$226,000 increase in non-deposit investment fee income, partially offset by a$773,000 decrease in debit card revenue. The increases in fee income are partially attributable to the addition of the SB One customer base, as well as a recovering economy compared to the initial severely negative impact COVID-19 had on consumer and business activity in the prior year. The decrease in debit card revenue was largely attributable to the impact of the Durbin amendment cap on the fee the Company receives on interchange transactions which first applied to the Company onJuly 1, 2021 . Wealth management income increased$1.1 million to$7.9 million for the three months endedSeptember 30, 2021 , compared to the same period in 2020, primarily due to an increase in the market value of assets under management as a result of strong equity market performance and new business generation. Insurance agency income, a new revenue opportunity for the Company resulting from the SB One acquisition, increased$722,000 to$2.4 million for the three months endedSeptember 30, 2021 , compared to the same period in 2020, primarily due to a full quarter of revenue in the 59 -------------------------------------------------------------------------------- current period, compared to two months in 2020. Additionally, income from Bank-owned life insurance ("BOLI") increased$236,000 to$1.9 million for the three months endedSeptember 30, 2021 , compared to the same period in 2020, primarily due to an increase in benefit claims, partially offset by lower equity valuations. Partially offsetting these increases in non-interest income, other income decreased$550,000 to$4.1 million for the three months endedSeptember 30, 2021 , compared to the quarter endedSeptember 30, 2020 , primarily due to a$3.7 million decrease in net fees on loan-level interest rate swap transactions and a$142,000 decrease in gains on the sale of loans, 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 ofTirschwell & Loewy, Inc. ("T&L"). For the nine months endedSeptember 30, 2021 , non-interest income totaled$66.2 million , an increase of$14.2 million , compared to the same period in 2020. Insurance agency income totaled$8.0 million , an increase of$6.3 million for the nine months endedSeptember 30, 2021 , compared to the same period in 2020, resulting from the prior year acquisition of SB One. Fee income increased$5.4 million to$22.6 million for the nine months endedSeptember 30, 2021 , compared to the same period in 2020, primarily due to a$2.7 million increase in commercial loan prepayment fees, a$740,000 increase in late charges and other loan related fee income, a$569,000 increase in debit card revenue, which was curtailed by the Durbin amendment, a$572,000 increase in non-deposit investment fee income and a$396,000 increase in deposit related fees. The increases in fee income are partially attributable to the addition of the SB One customer base, as well as a recovering economy compared to the initial severely negative effects that COVID-19 had on consumer and business activities in the prior year. Wealth management income increased$3.8 million to$22.9 million for the nine months endedSeptember 30, 2021 , compared to the same period in 2020, primarily due to an increase in the market value of assets under management as a result of strong equity market performance and new business generation. In addition, BOLI income increased$1.7 million to$6.0 million for the nine months endedSeptember 30, 2021 , compared to the same period in 2020, primarily due to an increase in benefit claims, additional income related to the BOLI assets acquired from SB One and higher equity valuations. Partially offsetting these increases, other income decreased$3.3 million to$6.4 million for the nine months endedSeptember 30, 2021 , compared to$9.7 million for the same period in 2020, mainly due to a$6.5 million decrease in net 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. Non-Interest Expense. For the three months endedSeptember 30, 2021 , non-interest expense totaled$63.4 million , an increase of$3.7 million , compared to the three months endedSeptember 30, 2020 . Compensation and benefits expense increased$1.9 million to$37.6 million for three months endedSeptember 30, 2021 , compared to$35.7 million for the same period in 2020. The increase was principally due to increases in the accrual for incentive compensation and stock-based compensation, partially offset by a decline in salary expense. Credit loss expense for off-balance sheet credit exposures increased$1.6 million to$980,000 for the three months endedSeptember 30, 2020 , compared to a negative provision of$575,000 for the same period in 2020. The increase was primarily the result of an increase in the pipeline of loans approved and awaiting closing. Net occupancy expenses increased$957,000 to$8.0 million for the three months endedSeptember 30, 2021 , compared to the same period in 2020, largely due to increases in rent, depreciation, utilities and maintenance expenses, which was largely due to an additional month of operating expenses in the current quarter associated with facilities acquired from SB One.FDIC insurance increased$390,000 due to an increase in the insurance assessment rate and an increase in total assets subject to assessment. Partially offsetting these increases in non-interest expense, other operating expenses decreased$875,000 to$8.9 million for the three months endedSeptember 30, 2021 , compared to the same period in 2020, principally due to non-recurring merger related expenses incurred in the prior year quarter, partially offset by an increase in business development expenses. Data processing expense decreased$199,000 to$4.8 million for the three months endedSeptember 30, 2021 , compared with the same period in 2020, primarily due to a decrease in core system processing costs, partially offset by an increase in software subscription service expense. Non-interest expense totaled$188.0 million for the nine months endedSeptember 30, 2021 , an increase of$18.8 million , compared to$169.2 million for the nine months endedSeptember 30, 2020 . Compensation and benefits expense increased$11.6 million to$107.7 million for the nine months endedSeptember 30, 2021 , compared to$96.1 million for the nine months endedSeptember 30, 2020 , primarily due to increases in salary expense and employee medical benefits associated with the addition of former SB One employees, combined with an increase in the accrual for incentive compensation, company-wide annual merit increases and an increase in stock-based compensation, partially offset by a decrease in severance expense. Net occupancy expense increased$5.8 million to$25.2 million for the nine months endedSeptember 30, 2021 , compared to the same period in 2020, mainly due to increases in rent, depreciation, utilities and maintenance expenses related to the facilities acquired from SB One, along with an increase in snow removal costs incurred earlier in the year.FDIC insurance increased$3.0 million for the nine months endedSeptember 30, 2021 , primarily due to an increase in the insurance assessment rate and an increase in total assets subject to assessment, including assets acquired from SB One, along with the receipt of the small bank assessment credit in the prior year that was not available in 2021. Other operating expenses increased$1.6 million to$28.0 million for the nine months endedSeptember 30, 2021 , compared to the same period in 2020. The increase in other 60
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operating expense was largely due to a valuation adjustment on foreclosed assets and increases in debit card maintenance, insurance and business development expenses, as a result of the addition of SB One, partially offset by non-recurring merger related expenses incurred in the prior year. In addition, amortization of intangibles increased$400,000 as a result of increased amortization related to the acquisition of SB One. Partially offsetting these increases, credit loss expense for off-balance sheet credit exposures decreased$3.6 million to$2.2 million for the nine months endedSeptember 30, 2021 . The decrease was primarily a function of an improved economic forecast resulting in a decline in projected loss factors, partially offset by an increase in the pipeline of loans approved and awaiting closing. Income Tax Expense. For the three months endedSeptember 30, 2021 , the Company's income tax expense was$12.9 million with an effective tax rate of 25.7%, compared with income tax expense of$9.3 million with an effective tax rate of 25.5% for the three months endedSeptember 30, 2020 . The increases in tax expense and the effective tax rate for the three months endedSeptember 30, 2021 , compared with the same period last year were largely the result of an increase in taxable income and the proportion of income derived from taxable sources. For the nine months endedSeptember 30, 2021 , the Company's income tax expense was$44.4 million with an effective tax rate of 25.4%, compared with$18.3 million with an effective tax rate of 24.5% for the nine months endedSeptember 30, 2020 . The increases in tax expense and the effective tax rate for the nine months endedSeptember 30, 2021 , compared with the same period last year were largely the result of an increase in taxable income and the proportion of income derived from taxable sources.
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