What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-06 compared with 2021-11-04 · 119 added, 272 removed, 246 unchanged (61% of the section changed)

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Important factors that might cause such a difference include, but are not limited to:

• the disruption to local, regional, national and global economic activity caused by infectious disease outbreaks, including the outbreak of coronavirus, or COVID-19, and the significant impact that such outbreak has had and may continue to have on our growth, operations and earnings;

• the disruption to local, regional, national and global economic activity caused by infectious disease outbreaks, including the outbreak of coronavirus (COVID-19) and the significant impact that such outbreak has had and may continue to have on our growth, operations and earnings;

• changes in asset quality, including increases in default rates on loans and higher levels of nonperforming loans and loan charge-offs generally, and specifically resulting from the economic dislocation caused by the COVID-19 pandemic;

• changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

• changes in federal, state, or local tax laws and tax rates;

• general economic conditions, either nationally or in our market areas, that are different than expected;

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• our ability to enter new markets successfully and capitalize on growth opportunities;

• managing our internal growth and our ability to successfully integrate acquired entities, businesses or branch offices;

• our ability to manager our internal growth and our ability to successfully integrate acquired entities, businesses or branch offices;

• changes in consumer spending, borrowing and savings habits;

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• our ability to receive regulatory approvals for proposed transactions or new lines of business;

• the effects of any federal government shutdown;

• changes in the financial performance and/or condition of our borrowers;

• the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the FASB and other accounting standard setters.

• changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses;

• our ability to access cost-effective funding;

• the effect of global or national war, conflict, or terrorism;

• our ability to manage market risk, credit risk and operational risk in the current economic environment;

• our ability to retain key employees;

• our compensation expense associated with equity allocated or aware to our employees.

Overview of Critical Accounting Policies Involving Estimates

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2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides temporary optional guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates.

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guidance provides expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met.

The guidance provides expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met.

The amendments primarily include contract modifications and hedge accounting, as well as providing a one-time election for the sale or transfer of debt securities classified as held-to-maturity.

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We are currently in the process of evaluating the amendments and determining the impact on our financial statements.

In March 2022, the FASB issued ASU No.

2022-02, “Financial Instruments - Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosure.” This ASU eliminates the accounting guidance for troubled debt restructurings, while enhancing disclosure requirements for certain loan modifications when a borrower is experiencing financial difficulty.

This ASU also requires the disclosure of current period gross write-offs by year for origination for financing receivables.

This guidance is effective for annual periods beginning after December 15, 2022, including interim periods within those years, with early adoption permitted.

This ASU is applied prospectively to modifications and write-offs beginning on the first day of the fiscal year of adoption.

An entity may elect to adopt a modified retrospective transition method on the recognition and measurement of the TDR guidance.

We are currently in the process of evaluating the ASU and determining the impact on our financial statements.

Comparison of Financial Condition

Total assets at September 30, 2021 were $14.389 billion, an increase of $583.0 million, or 4.2%, from $13.806 billion at December 31, 2020.

This increase in assets was due to an increase in marketable securities as well as an increase in total cash and cash equivalents, as described in further detail below.

Total cash and cash equivalents increased by $354.2 million, or 48.1%, to $1.090 billion at September 30, 2021 from $736.3 million at December 31, 2020.

This increase was primarily due to the increase in customer deposit balances associated with consumer stimulus checks and loan funds from the Paycheck Protection Program ("PPP").

Total marketable securities increased by $624.3 million, or 39.6%, to $2.202 billion at September 30, 2021 from $1.578 billion at December 31, 2020.

This increase was primarily due to the $439.5 million increase in held-to-maturity marketable securities as a result of investing excess cash generated by deposits within our held-to-maturity portfolio.

Total loans receivable decreased by $381.9 million, or 3.6%, to $10.199 billion at September 30, 2021, from $10.581 billion at December 31, 2020.

This decrease was due to loan paydowns and payoffs outpacing new originations across all of our loan portfolios including PPP forgiveness, with the exception of consumer loans, primarily indirect auto, which increased by $308.8 million, or 20.5%, to $1.817 billion at September 30, 2021 compared to $1.508 billion at December 31, 2020.

Total deposits increased by $623.0 million, or 5.4%, to $12.222 billion at September 30, 2021 from $11.599 billion at December 31, 2020.

This increase was primarily due to increases in checking deposits of $506.3 million, or 9.3%, as well as savings and money market deposits of $371.0 million, or 8.3%.

T hese increases were primarily the result of consumer stimulus checks and PPP loan funds.

Partially offsetting this increase was a decrease in time deposits of $254.3 million, or 15.5%, as customers moved funds from term products to checking and savings accounts.

Total shareholders’ equity at September 30, 2021 was $1.562 billion, or $12.34 per share, an increase of $23.1 million, or 1.5%, from $1.539 billion, or $12.11 per share, at December 31, 2020.

This increase was primarily the result of year-to-date earnings of $124.3 million.

Partially offsetting this increase was the payment of cash dividends of $75.0 million for the nine months ended September 30, 2021 as well as the payment of $23.9 million for share repurchases for the nine months ended September 30, 2021.

Total assets at March 31, 2022 were $14.411 billion, a decrease of $90.3 million, or 0.6%, from $14.502 billion at December 31, 2021.

This decrease in assets was due to a decrease in marketable securities as well as a decrease in total cash and cash equivalents, partially offset by an increase in loans receivable, as described in further detail below.

Total cash and cash equivalents decreased by $118.3 million, or 9.2%, to $1.161 billion at March 31, 2022 from $1.279 billion at December 31, 2021.

This decrease was driven by the purchase of a $72.7 million small business equipment finance pool and a $138.1 million one-to four-family jumbo mortgage package during March.

Total marketable securities decreased by $136.9 million, or 5.9%, to $2.180 billion at March 31, 2022 from $2.317 billion at December 31, 2021.

This decrease was primarily due to the $106.5 million decrease in available-for-sale marketable securities primarily as a result of the rising interest rate environment which negatively impacted the fair market value.

Total loans receivable increased by $122.6 million, or 1.2%, to $10.139 billion at March 31, 2022, from $10.016 billion at December 31, 2021.

This increase was due to the purchase of the loan pools described above, as well as continued growth of consumer indirect auto loans, which increased by $63.0 million, or 4.2%, to $1.547 billion at March 31, 2022 compared to $1.484 billion at December 31, 2021.

These increases were offset by decreases across all other portfolios due to loan paydowns and payoffs, including $32.1 million of PPP loan forgiveness, outpacing originations.

Total deposits increased by $19.2 million, or 0.2%, to $12.320 billion at March 31, 2022 from $12.301 billion at December 31, 2021.

This increase was primarily due to increases in savings and money market deposits of $114.4 million, or 2.3%.

T hese increases were primarily the result of customers reinvesting time deposit maturities and annual tax refunds.

Partially offsetting this increase was a decrease in time deposits of $75.7 million, or 5.7%, as customers continue to move funds from term products to checking and savings accounts.

Total shareholders’ equity at March 31, 2022 was $1.524 billion, or $12.03 per share, a decrease of $60.1 million, or 3.8%, from $1.584 billion, or $12.51 per share, at December 31, 2021.

This decrease was primarily the result of an increase in accumulated

other comprehensive loss of $64.9 million due to an increase in unrealized losses in the investment portfolio, as well as a payment of cash dividends of $25.3 million for the three months ended March 31, 2022.

This decrease was partially offset by quarterly earnings of $28.3 million.

Regulatory Capital

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Applicable rules limit an organization’s capital distributions and certain discretionary bonus payments if the organization does not hold a “ capital conservation buffer ” consisting of 2.5% of Total, Tier 1 and Common Equity Tier 1 ( “ CET1 ” ) capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.

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Quantitative measures, established by regulation to ensure capital adequacy, require financial institutions to maintain minimum amounts and ratios (set forth in the table below) of Total, CET1 and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined).

Capital requirements are presented in the tables below (in thousands).

At September 30, 2021

Minimum capital Well capitalized

Actual requirements (1) requirements

At March 31, 2022

Actual Minimum capital requirements (1) Well capitalized requirements

Amount Ratio Amount Ratio Amount Ratio

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At December 31, 2021

Minimum capital Well capitalized

Actual requirements (1) requirements

Actual Minimum capital requirements (1) Well capitalized requirements

Amount Ratio Amount Ratio Amount Ratio

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(1) Amounts and ratios include the capital conservation buffer of 2.5%, which does not apply to Tier 1 capital to average assets (leverage ratio).

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We are required to maintain a sufficient level of liquid assets, as determined by management and reviewed for adequacy by the FDIC and the Pennsylvania Department of Banking and Securities during their regular examinations.

Northwest monitors its liquidity position primarily using the ratio of unencumbered available-for-sale liquid assets as a percentage of deposits and borrowings (“liquidity ratio”).

Northwest Bank’s liquidity ratio at September 30, 2021 was 20.4%.

Northwest Bank’s liquidity ratio at March 31, 2022 was 19.2%.

We adjust liquidity levels in order to meet funding needs for deposit outflows, payment of real estate taxes and insurance on mortgage loan escrow accounts, repayment of borrowings and loan commitments.

At September 30, 2021, Northwest had $3.511 billion of additional borrowing capacity available with the FHLB, including $250.0 million on an overnight line of credit which had no balance at September 30, 2021, as well as $79.5 million of borrowing capacity available with the Federal Reserve Bank and $110.0 million with three correspondent banks.

We paid $25.4 million and $24.3 million in cash dividends during the quarters ended September 30, 2021 and 2020, respectively.

The common stock dividend payout ratio (dividends declared per share divided by net income per diluted share) was 74.1% and 63.3% for the quarters ended September 30, 2021 and September 30, 2020, respectively, on dividends of $0.20 per share for the quarter ended September 30, 2021 and $0.19 per share for the quarter ended September 30, 2020.

On October 25, 2021, the Board of Directors declared a cash dividend of $0.20 per share payable on November 15, 2021 to shareholders of record as of November 5, 2021.

At March 31, 2022, Northwest had $3.526 billion of additional borrowing capacity available with the FHLB, including $250.0 million on an overnight line of credit which had no balance at March 31, 2022, as well as $91.4 million of borrowing capacity available with the Federal Reserve Bank and $110.0 million with three correspondent banks.

We paid $25.3 million and $24.1 million in cash dividends during the quarters ended March 31, 2022 and 2021, respectively.

The common stock dividend payout ratio (dividends declared per share divided by net income per diluted share) was 90.9% and 59.4% for the quarters ended March 31, 2022 and March 31, 2021, respectively, on dividends of $0.20 per share for the quarter ended March 31, 2022 and $0.19 per share for the quarter ended March 31, 2021.

On April 25, 2022, the Board of Directors declared a cash dividend of $0.20 per share payable on May 16, 2022 to shareholders of record as of May 5, 2022.

This represents the 110 th consecutive quarter we have paid a cash dividend.

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Foreclosed property is carried at the lower of its fair value less estimated costs to sell or the principal balance of the related loan.

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

(in thousands)

Nonaccrual loans 90 days or more past due:

Loans 90 days or more past due:

Residential mortgage loans $ 3,976 7,641

Home equity loans 2,968 4,262

Consumer loans 2,184 5,473

Vehicle loans 1,432 1,635

Other consumer loans 770 765

Commercial real estate loans 21,264 23,489

Commercial real estate - owner occupied 135 574

Commercial loans 795 1,105

Total nonaccrual loans 90 days or more past due 41,664 61,015

Total REO, net $ 809 2,232

Total loans 90 days or more past due $ 31,340 39,471

Total real estate owned (REO) $ 929 873

Total loans 90 days or more past due and REO 32,269 40,344

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Nonaccrual loans - loans less than 90 days past due 93,241 119,331

Loans 90 days or more past due and still accruing 386 585

Loans 90 days or more past due still accruing 420 331

Total nonperforming loans 124,581 158,802

Total nonperforming assets $ 125,510 159,675

Total nonaccrual loans to total loans 1.22 % 1.59 %

Nonaccrual TDR loans (1) $ 16,015 17,216

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(1) Included in nonaccrual loans above.

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Allowance for Credit Losses

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A “substandard” loan is any loan that is 90 days or more contractually delinquent or is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.

Loans classified as “doubtful” have all the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions or values, highly questionable and improbable.

conditions or values, highly questionable and improbable.

Loans classified as “loss” have all the weakness inherent in those classified as “ doubtful” and are considered uncollectible.

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We acknowledge that this is a dynamic process and consists of factors, many of which are external and out of our control that can change frequently, rapidly and substantially.

The adequacy of the ACL is based upon estimates using all the information

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previously discussed as well as current and known circumstances and events.

The adequacy of the ACL is based upon estimates using all the information previously discussed as well as current and known circumstances and events.

There is no assurance that actual portfolio losses will not be substantially different than those that were estimated.

We utilize a structured methodology each period when analyzing the adequacy of the allowance for credit losses and the related provision for credit losses, which the ACL Committee assesses regularly for appropriateness.

As part of the analysis as of September 30, 2021, we considered the most recent economic conditions and forecasts available which incorporated the impact of COVID-19.

As part of the analysis as of March 31, 2022, we considered the most recent economic conditions and forecasts available which incorporated the impact of material recent economic events.

In addition, we considered the overall trends in asset quality, reserves on individually assessed loans, historical loss rates and collateral valuations.

The ACL decreased by $24.7 million, or 18.3%, to $109.8 million, or 1.08% of total loans at September 30, 2021 from $134.4 million, or 1.27% of total loans, at December 31, 2020.

Total classified loans decreased $105.0 million, or 21.4%, to $384.4 million at September 30, 2021 from $489.3 million at December 31, 2020.

This decrease was primarily due to the upgrade and payoff of loans in our commercial real estate portfolio during the year.

The ACL decreased by $2.9 million, or 2.9%, to $99.3 million, or 0.98% of total loans at March 31, 2022 from $102.2 million, or 1.02% of total loans, at December 31, 2021.

Total classified loans decreased $43.3 million, or 11.9%, to $319.9 million at March 31, 2022 from $363.2 million at December 31, 2021.

This decrease was primarily due to the upgrade and payoff of loans in our commercial real estate portfolio during the current quarter.

We also consider how the levels of nonaccrual loans and historical charge-offs have influenced the required amount of allowance for credit losses.

Nonaccrual loans of $176.9 million, or 1.73% of total loans receivable at September 30, 2021, increased by $74.1 million, or 72.1%, from $102.8 million, or 0.97% of total loans receivable at December 31, 2020.

This increase was primarily related to loans within the hospitality industry as they were judgmentally placed on nonaccrual after the end of their deferral periods.

As a percentage of average loans, annualized net charge-offs decreased to 0.12% for the quarter ended September 30, 2021 compared to 0.13% for the year ended December 31, 2020.

Comparison of Operating Results for the Quarters Ended September 30, 2021 and 2020

Net income for the quarter ended September 30, 2021 was $35.1 million, or $0.27 per diluted share, a decrease of $3.0 million, or 7.9%, from net income of $38.1 million, or $0.30 per diluted share, for the quarter ended September 30, 2020.

The decrease in net income primarily resulted from a decrease in noninterest income of $7.5 million, or 20.4%, and a decrease in net interest income of $5.1 million, or 4.9%.

Partially offsetting these changes was a decrease in provision for credit losses of $11.2 million, or 163.9%, and a decrease in noninterest expense of $767,000, or 0.9%.

Net income for the quarter ended September 30, 2021 represents annualized returns on average equity and average assets of 8.86% and 0.97%, respectively, compared to 9.82% and 1.09% for the same quarter last year.

Nonaccrual loans of $124.2 million, or 1.22% of total loans receivable at March 31, 2022, decreased by $34.3 million, or 21.7%, from $158.5 million, or 1.59% of total loans receivable at December 31, 2021.

This decrease was primarily related to upgrades to loans within our commercial real estate portfolio.

As a percentage of average loans, annualized net charge-offs decreased to 0.06% for the quarter ended March 31, 2022 compared to 0.20% for the year ended December 31, 2021.

Comparison of Operating Results for the Quarters Ended March 31, 2022 and 2021

Net income for the quarter ended March 31, 2022 was $28.3 million, or $0.22 per diluted share, a decrease of $12.0 million, or 29.7%, from net income of $40.2 million, or $0.32 per diluted share, for the quarter ended March 31, 2021.

The decrease in net

income primarily resulted from a decrease in net interest income of $9.8 million, or 9.8% and a decrease in noninterest income of $6.2 million, or 19.4%.

Partially offsetting these changes was a decrease in the negative provision for credit losses of $4.1 million, or 73.6% , a decrease in noninterest expense of $4.2 million, or 4.9%, and a $4.0 million, or 34.4%, decrease in income tax expense.

Net income for the quarter ended March 31, 2022 represents annualized returns on average equity and average assets of 7.17% and 0.80%, respectively, compared to 10.61% and 1.17% for the same quarter last year.

A further discussion of notable changes follows.

Interest Income

Total interest income decreased $8.4 million, or 7.4%, to $105.0 million for the quarter ended September 30, 2021 from $113.4 million for the quarter ended September 30, 2020.

This decrease is due to a decrease in the average yield earned on interest-earning assets to 3.13% for the quarter ended September 30, 2021 from 3.52% for the quarter ended September 30, 2020 due to decreases in market interest rates over the past 18 months.

Offsetting this decrease in average yield earned was an increase in the average balance of interest-earning assets by $518.8 million, or 4.0%, to $13.334 billion for the quarter ended September 30, 2021 from $12.815 billion for the quarter ended September 30, 2020, which was primarily driven by growth in the mortgage-backed securities portfolio.

Interest income on loans receivable decreased by $9.8 million, or 9.1%, to $97.5 million for the quarter ended September 30, 2021 compared to $107.2 million for the quarter ended September 30, 2020.

Total interest income decreased $11.6 million, or 10.7%, to $96.4 million for the quarter ended March 31, 2022 from $108.0 million for the quarter ended March 31, 2021.

This decrease is due to a decrease in the average yield earned on interest-earning assets to 2.91% for the quarter ended March 31, 2022 from 3.40% for the quarter ended March 31, 2021 due to the continued low interest rate environment.

Offsetting this decrease in average yield earned was an increase in the average balance of interest-earning assets by $565.2 million, or 4.4%, to $13.450 billion for the quarter ended March 31, 2022 from $12.885 billion for the quarter ended March 31, 2021, which was primarily driven by growth in the mortgage-backed securities portfolio.

Interest income on loans receivable decreased by $14.1 million, or 13.8%, to $88.2 million for the quarter ended March 31, 2022 compared to $102.3 million for the quarter ended March 31, 2021.

This decrease in interest income was due to decreases in both the average balance of loans receivable and the average yield on loans receivable.

The average balance of loans receivable decreased $551.4 million, or 5.1%, to $10.226 billion for the quarter ended September 30, 2021 from $10.777 billion for the quarter ended September 30, 2020 due to slower loan demand and $580.0 million of PPP loan forgiveness since September 30 of last year.

The average yield on loans receivable decreased to 3.79% for the quarter ended September 30, 2021 from 3.96% for the quarter ended September 30, 2020, due to the decrease in market interest rates.

Included in loan interest income for the current quarter is $4.1 million of accretion related to PPP fees, net of origination costs, compared to $1.8 million in the third quarter last year.

Interest income on mortgage-backed securities increased by $1.2 million, or 25.5%, to $5.8 million for the quarter ended September 30, 2021 compared to $4.7 million for the quarter ended September 30, 2020.

This increase was driven by an increase in the average balance of mortgage-backed securities of $828.1 million, or 82.4%, to $1.833 billion for the quarter ended September 30, 2021 from $1.005 billion for the quarter ended September 30, 2020.

The average balance of loans receivable decreased $507.7 million, or 4.9%, to $9.899 billion for the quarter ended March 31, 2022 from $10.406 billion for the quarter ended March 31, 2021 due to slower loan demand and $361.3 million of PPP loan forgiveness since March 31 of last year.

The average yield on loans receivable decreased to 3.61% for the quarter ended March 31, 2022 from 3.99% for the quarter ended March 31, 2021, due to the decrease in market interest rates.

Also, i ncluded in loan interest income for the current quarter is just $1.2 million of accretion related to PPP fees, net of origination costs, compared to $4.8 million in the first quarter last year.

Interest income on mortgage-backed securities increased by $2.2 million, or 51.4%, to $6.4 million for the quarter ended March 31, 2022 compared to $4.2 million for the quarter ended March 31, 2021.

This increase was driven by an increase in the average balance of mortgage-backed securities of $620.6 million, or 46.9%, to $1.945 billion for the quarter ended March 31, 2022 from $1.325 billion for the quarter ended March 31, 2021.

This increase in average balance was primarily a result of additional purchases utilizing excess cash from deposit growth during the past year.

Offsetting this increase was a decrease in the average yield on mortgage-backed securities to 1.27% for the quarter ended September 30, 2021 from 1.85% for the quarter ended September 30, 2020 due to new purchases at lower market yields than our existing portfolio.

Interest income on investment securities increased by $195,000, or 18.0%, for the quarter ended September 30, 2021 to $1.3 million from $1.1 million for the quarter ended September 30, 2020.

This increase was due to an increase in the average balance of investment securities by $132.5 million, or 61.3%, to $348.6 million for the quarter ended September 30, 2021 from $216.1 million for the quarter ended September 30, 2020.

The average balance of investment securities increased due to the utilization of excess funds

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from deposit growth.

Partially offsetting this increase was a decrease in the average yield on investment securities which decreased to 1.47% for the quarter ended September 30, 2021 from 2.00% for the quarter ended September 30, 2020 due to new investment purchases at yields lower than the existing portfolio.

Dividends on FHLB stock decreased by $147,000, or 67.4%, to $71,000 for the quarter ended September 30, 2021 from $218,000 for the quarter ended September 30, 2020.

This decrease was due to both the decrease in average yield on FHLB stock and the decrease in the average balance of FHLB stock.

The average yield decreased to 1.31% for the quarter ended September 30, 2021 from 3.39% for the quarter ended September 30, 2020 as the FHLB of Pittsburgh recently decreased yields on required stock holdings in reaction to lower market interest rates.

The average balance of FHLB stock decreased by $4.0 million, or 15.6%, to $21.6 million for the quarter ended September 30, 2021 from $25.6 million for the quarter ended September 30, 2020.

The average yield on mortgage-backed securities remained relatively consistent, increasing slightly to 1.31% for the quarter ended March 31, 2022 from 1.27% for the quarter ended March 31, 2021.

Interest income on investment securities increased by $142,000, or 11.7%, for the quarter ended March 31, 2022 to $1.4 million from $1.2 million for the quarter ended March 31, 2021.

This increase was due to an increase in the average balance of investment securities by $42.3 million, or 12.8%, to $373.7 million for the quarter ended March 31, 2022 from $331.4 million for the quarter ended March 31, 2021.

The average balance of investment securities increased due to the utilization of excess funds from deposit growth.

The average yield on investment securities remained consistent, decreasing slightly to 1.45% for the quarter ended March 31, 2022 from 1.46% for the quarter ended March 31, 2021.

Dividends on FHLB stock decreased by $35,000, or 30.2%, to $81,000 for the quarter ended March 31, 2022 from $116,000 for the quarter ended March 31, 2021.

This decrease was due to the decrease in the average balance of FHLB stock.

The average balance of FHLB stock decreased by $7.9 million, or 36.4%, to $13.9 million for the quarter ended March 31, 2022 from $21.8 million for the quarter ended March 31, 2021.

Required FHLB stock holdings fluctuate with, among other things, the utilization of our borrowing capacity as well as capital requirements established by the FHLB.

Interest income on interest-earning deposits increased by $131,000, or 59.3%, to $352,000 for the quarter ended September 30, 2021 from $221,000 for the quarter ended September 30, 2020.

The average balance of interest-earning deposits increased by $113.5 million, or 14.3%, to $905.1 million for the quarter ended September 30, 2021 from $791.6 million for the quarter ended September 30, 2020 due to excess liquidity from recent deposit inflows.

Also contributing to this increase was an increase in the average yield on interest-earning deposits to 0.15% for the quarter ended September 30, 2021 from 0.11% for the quarter ended September 30, 2020.

The average yield increased to 2.38% for the quarter ended March 31, 2022 from 2.17% for the quarter ended March 31, 2021.

Interest income on interest-earning deposits increased by $284,000, or 155.2%, to $467,000 for the quarter ended March 31, 2022 from $183,000 for the quarter ended March 31, 2021.

The average balance of interest-earning deposits increased by $417.8 million, or 52.2%, to $1.2 billion for the quarter ended March 31, 2022 from $801.1 million for the quarter ended March 31, 2021 due to excess liquidity from loan paydowns and payoffs as well as PPP loan forgiveness.

Also contributing to this increase was an increase in the average yield on interest-earning deposits to 0.15% for the quarter ended March 31, 2022 from 0.09% for the quarter ended March 31, 2021.

Interest Expense

Interest expense decreased by $3.3 million, or 33.2%, to $6.6 million for the quarter ended September 30, 2021 from $9.9 million for the quarter ended September 30, 2020.

This decrease in interest expense was primarily due to the decline in the average cost of interest-bearing liabilities, which decreased to 0.27% for the quarter ended September 30, 2021 from 0.42% for the quarter ended September 30, 2020.

This decrease resulted from decreases in the interest rate paid on deposits and junior subordinated debentures in response to decreases in market interest rates.

Partially offsetting this decrease was an increase in the average balance of interest-bearing liabilities by $159.1 million, or 1.7%, to $9.534 billion for the quarter ended September 30, 2021 from $9.375 billion for the quarter ended September 30, 2020.

This increase in average balance resulted from internal growth in deposits.

In addition, on September 9, 2020, the Company issued $125 million of fixed-to-floating subordinated debt with an initial five-year fixed interest rate of 4.00%.

Interest expense decreased by $1.8 million, or 23.2%, to $5.8 million for the quarter ended March 31, 2022 from $7.6 million for the quarter ended March 31, 2021.

This decrease in interest expense was primarily due to the decline in the average cost of interest-bearing liabilities, which decreased to 0.25% for the quarter ended March 31, 2022 from 0.33% for the quarter ended March 31, 2021.

This decrease resulted from decreases in the interest rate paid on deposits in response to decreases in market interest rates.

Partially offsetting this decrease was an increase in the average balance of interest-bearing liabilities by $180.2 million, or 1.9%,

to $9.559 billion for the quarter ended March 31, 2022 from $9.378 billion for the quarter ended March 31, 2021.

This increase in the average balance resulted from growth in deposits.

Net Interest Income

Net interest income decreased by $5.1 million, or 4.9%, to $98.4 million for the quarter ended September 30, 2021 from $103.5 million for the quarter ended September 30, 2020.

Net interest income decreased by $9.8 million, or 9.8%, to $90.6 million for the quarter ended March 31, 2022 from $100.5 million for the quarter ended March 31, 2021.

This decrease is attributable to the factors discussed above.

Our interest rate spread decreased to 2.86% for the quarter ended September 30, 2021 from 3.10% for the quarter ended September 30, 2020 and our net interest margin decreased to 2.95% for the quarter ended September 30, 2021 from 3.23% for the quarter ended September 30, 2020 primarily due to declining interest-earning asset yields.

Our interest rate spread decreased to 2.66% for the quarter ended March 31, 2022 from 3.07% for the quarter ended March 31, 2021 and our net interest margin decreased to 2.73% for the quarter ended March 31, 2022 from 3.16% for the quarter ended March 31, 2021 primarily due to declining interest-earning asset yields as well as the increased weighting of cash and investments as a percentage of total assets.

Provision for Credit Losses

The provision for credit losses decreased by $11.2 million, or 163.9%, to a current period credit of $4.4 million for the quarter ended September 30, 2021 compared to a provision expense of $6.8 million for the quarter ended September 30, 2020.

The prior year was impacted by COVID-19 and the uncertainty surrounding the possible negative effect on the economy .

As such, the provision in the prior year was driven by the estimated increase in possible future loan losses.

The current period decrease in provision was driven by continued improvements in economic forecasts compared to the uncertainty that existed last year due to COVID-19.

The negative provision for credit losses decreased by $4.1 million, or 73.6%, to a current period credit of $1.5 million for the quarter ended March 31, 2022 compared to a negative provision of $5.6 million for the quarter ended March 31, 2021.

The current period negative provision was driven by continued improvements in asset quality and classified loans, as described above.

T he negative provision in the prior year was driven by the release of the previously outsized allowance for credit losses established during the COVID-19 pandemic.

In determining the amount of the current period provision, we considered current and forecasted economic conditions, including but not limited to improvements in unemployment levels, expected economic growth, bankruptcy filings, and changes in real estate values and the impact of these factors on the quality of our loan portfolio and historical loss experience.

We analyze the allowance for credit losses as described in the section entitled "Allowance for Credit Losses." The provision that is recorded is sufficient, in our judgment, to bring this reserve to a level that reflects the current expected lifetime losses in our loan portfolio relative to loan mix, a reasonable and supportable economic forecast period and historical loss experience at September 30, 2021.

We analyze the allowance for credit losses as described in the section entitled “ Allowance for Credit Losses.

” The provision that is recorded is sufficient, in our judgment, to bring this reserve to a level that reflects the current expected lifetime losses in our loan portfolio relative to loan mix, a reasonable and supportable economic forecast period and historical loss experience at March 31, 2022.

Noninterest Income

Noninterest income decreased by $7.5 million, or 20.4%, to $29.2 million for the quarter ended September 30, 2021 from $36.7 million for the quarter ended September 30, 2020.

This decrease was primarily due to a decrease in mortgage banking income of $7.1 million, or 64.4%, to $3.9 million for the quarter ended September 30, 2021 from $11.1 million for the quarter ended

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September 30, 2020 due to t he impact of less favorable pricing in the secondary market.

In addition, insurance commission income decreased by $2.3 million, or 98.1%, to $44,000 for the quarter ended September 30, 2021 from $2.3 million for the quarter ended September 30, 2020 due to the sale of the insurance business during the second quarter of 2021.

Lastly, service charges and fees decreased $1.2 million, or 8.0%, to $13.2 million for the quarter ended September 30, 2021 from $14.4 million for the quarter ended September 30, 2020 due primarily to the impact of being subject to the Durbin amendment on interchange revenue.

Partially offsetting this decrease was an increase in trust and other financial services income of $1.8 million, or 33.6%, to $7.2 million for the quarter ended September 30, 2021 from $5.4 million for the quarter ended September 30, 2020 as a result of increases in both trust and brokerage advisory services.

In addition, there was an increase in other operating income of $1.3 million, or 62.6%, to $3.3 million for the quarter ended September 30, 2021 from $2.0 million for the quarter ended September 30, 2020 primarily as a result of fees earned from debit/credit card volume-based incentives.

Noninterest income decreased by $6.2 million, or 19.4%, to $25.7 million for the quarter ended March 31, 2022 from $32.0 million for the quarter ended March 31, 2021.

This decrease was primarily due to a decrease in mortgage banking income of $4.6 million, or 75.7%, to $1.5 million for the quarter ended March 31, 2022 from $6.0 million for the quarter ended March 31, 2021 due to t he impact of less favorable pricing in the secondary market.

In addition, insurance commission income decreased by $2.5 million, or 100.0%, for the quarter ended March 31, 2022 due to the sale of the insurance business during the second quarter of 2021.

Partially offsetting these decreases was an increase in service charges and fees of $673,000, or 5.4%, as customer activity increased in 2022 after COVID-19 restricted behavior in the prior year.

In addition, trust and other financial services income increased $528,000, or 8.1%, due to successful growth in wealth management relationships.

Noninterest Expense

Noninterest expense decreased by $767,000, or 0.9%, to $86.1 million for the quarter ended September 30, 2021 from $86.9 million for the quarter ended September 30, 2020.

Noninterest expense decreased by $4.2 million, or 4.9%, to $81.9 million for the quarter ended March 31, 2022 from $86.2 million for the quarter ended March 31, 2021.

This decrease was due to a decline in a majority of the noninterest expense categories.

Processing expenses decreased $1.5 million, or 10.1%, to $13.5 million for the quarter ended September 30, 2021 from $15.0 million for the quarter ended September 30, 2020 .

Merger related expenses decreased $1.4 million, or 100.0%, due to expenses incurred in the prior year as a result of the acquisition of MutualFirst Financial, Inc.

Partially offsetting these decreases was an increase of $1.7 million, or 3.6%, in compensation and employee benefits due primarily to increases in health insurance and other benefit costs, regular merit expense increases and the addition of strategic personnel.

In addition, there was an increase in other expenses of $2.2 million for the quarter ended September 30, 2021 due primarily due to an increase in the unfunded reserve as a result of an increase in the undrawn commitments in the commercial real estate and construction portfolios.

The provision for income taxes increased by $2.3 million, or 27.5%, to $10.8 million for the quarter ended September 30, 2021 from $8.5 million for the quarter ended September 30, 2020.

This increase in income taxes was due to an increase in the annual effective tax rate for 2021 as the prior year had a greater percentage of net income generated by tax free or tax efficient earning assets.

We anticipate our effective tax rate to be between 22.0% and 24.0% for the year ending December 31, 2021.

Comparison of Operating Results for the Nine Months Ended September 30, 2021 and 2020

Net income for the nine months ended September 30, 2021 was $124.3 million, or $0.97 per diluted share, an increase of $84.5 million, or 212.3%, from $39.8 million, or $0.34 per diluted share, for the nine months ended September 30, 2020.

The increase in net income resulted primarily from a decrease in provision for credit losses of $96.2 million, or 111.6% , as well as an increase in noninterest income of $15.7 million, or 15.7%, and an increase in net interest income of $5.8 million, or 2.0%.

Partially offsetting these factors were an increase of $4.0 million, or 1.6%, in noninterest expense and an increase in income tax expense of $29.2 million.

Net income for the nine months ended September 30, 2021 represents annualized returns on average equity and average assets of 10.67% and 1.17%, respectively, compared to 3.33% and 0.42% for the nine months ended September 30, 2020.

A further discussion of notable changes follows.

Interest Income

Total interest income decreased by $6.7 million, or 2.1%, to $315.6 million for the nine months ended September 30, 2021 from $322.3 million for the nine months ended September 30, 2020.

This decrease is the result of a decrease in the average yield earned on interest-earning assets to 3.20% for the nine months ended September 30, 2021 from 3.78% for the nine months ended September 30, 2020.

This decrease in average yield is attributed to a decline in overall market interest rates.

Partially offsetting this decrease was an increase in the average balance of interest-earning assets of $1.759 billion, or 15.4%, to $13.158 billion for the nine months ended September 30, 2021 from $11.400 billion for the nine months ended September 30, 2020 due primarily to the investment of excess cash from deposit growth.

Interest income on loans receivable decreased by $10.2 million, or 3.3%, to $295.0 million for the nine months ended September 30, 2021 from $305.2 million for the nine months ended September 30, 2020.

This decrease is attributed to a decrease in the average yield on loans receivable to 3.82% for the nine months ended September 30, 2021 from 4.11% for the nine months ended September 30, 2020 primarily as a result of the decrease in market interest rates.

Partially offsetting this decrease was an increase in the average balance of loans receivable of $387.9 million, or 3.9%, to $10.309 billion for the nine months ended September 30, 2021 from $9.921 billion for the nine months ended September 30, 2020.

This increase is due to organic loan growth as well as the origination of almost $800.0 million of PPP loans over the past 18 months.

Included in loan interest income for the current period is $11.4 million of accretion related to PPP fees, net of origination costs, compared to $2.9 million in the prior year period.

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Interest income on mortgage-backed securities increased by $2.9 million, or 22.2%, to $15.7 million for the nine months ended September 30, 2021 from $12.9 million for the nine months ended September 30, 2020.

This increase is attributed to an increase in the average balance of mortgage-backed securities of $843.0 million, or 105.8%, to $1.640 billion for the nine months ended September 30, 2021 from $796.7 million for the nine months ended September 30, 2020.

This increase is due primarily to the additional purchases utilizing excess cash from deposit growth during the past year.

Partially offsetting this increase was a decrease in the average yiel d on mortgage-backed securities to 1.28% for the quarter ended September 30, 2021 from 2.15% for the quarter ended September 30, 2020.

This decrease in yield was primarily due to new purchases of mortgage-backed securities at lower market yields than our existing portfolio.

Interest income on investment securities increased by $855,000, or 29.3%, to $3.8 million for the nine months ended September 30, 2021 from $2.9 million for the nine months ended September 30, 2020.

This increase is primarily attributable to an increase in the average balance of investment securities of $171.2 million, or 96.7%, to $348.2 million for the nine months ended September 30, 2021 from $177.0 million for the nine months ended September 30, 2020.

The average balance of investments increased due to the utilization of excess funds from deposit growth.

Partially offsetting this increase was a decrease in the average yield on investment securities to 1.44% for the nine months ended September 30, 2021 from 2.20% for the nine months ended September 30, 2020.

Dividends on FHLB stock decreased by $464,000, or 58.8%, to $325,000 for the nine months ended September 30, 2021 from $789,000 for the nine months ended September 30, 2020.

This decrease was due to a decrease in the average yield on FHLB stock to 1.95% for the nine months ended September 30, 2021 from 4.96% for the nine months ended September 30, 2020 as the FHLB of Pittsburgh decreased yields on required stock holdings due to lower market interest rates.

Partially offsetting this decrease was an increase of $919,000, or 4.3%, in the average balance of FHLB stock to $22.2 million for the nine months ended September 30, 2021 from $21.3 million for the nine months ended September 30, 2020.

Required FHLB stock holdings fluctuate with, among other things, the utilization of our borrowing capacity as well as capital requirements established by the FHLB.

Interest income on interest-earning deposits increased by $186,000, or 34.4%, to $727,000 for the nine months ended September 30, 2021 from $541,000 for the nine months ended September 30, 2020.

This increase is attributable to an increase in the average balance of interest-earning deposits which increased by $355.6 million, or 73.6%, to $839.0 million for the nine months ended September 30, 2021 from $483.4 million for the nine months ended September 30, 2020 due to excess liquidity from steady deposit inflows.

Partially offsetting this increase was a decrease in the average yield on interest-earning deposits to 0.11% for the nine months ended September 30, 2021 from 0.15% for the nine months ended September 30, 2020, as a result of decreases in the targeted federal funds rate by the Federal Reserve.

Interest Expense

Interest expense decreased by $12.5 million, or 37.4%, to $21.0 million for the nine months ended September 30, 2021 from $33.5 million for the nine months ended September 30, 2020.

This decrease in interest expense was due to a decrease in the average cost of interest-bearing liabilities to 0.30% for the nine months ended September 30, 2021 from 0.53% for the nine months ended September 30, 2020.

This decrease resulted from decreases in the interest rate paid on deposits and junior subordinated debentures in response to decreases in market interest rates.

Partially offsetting this decrease was an increase in the average balance of interest-bearing liabilities which increased by $976.1 million, or 11.5%, to $9.475 billion for the nine months ended September 30, 2021 from $8.499 billion for the nine months ended September 30, 2020.

This increase resulted from internal growth in deposits.

In addition, on September 9, 2020, the Company issued $125 million of fixed-to-floating subordinated debt with an initial five year fixed interest rate of 4.00%.

Net Interest Income

Net interest income increased by $5.8 million, or 2.0%, to $294.6 million for the nine months ended September 30, 2021 from $288.8 million for the nine months ended September 30, 2020.

This increase is attributable to the factors discussed above.

Despite the overall increase in net interest income due primarily to balance sheet growth and the accretion of net PPP fees, our interest rate spread and net interest margin both decreased.

Our interest rate spread decreased to 2.91% for the nine months ended September 30, 2021 from 3.25% for the nine months ended September 30, 2020 and our net interest margin decreased to 2.99% for the nine months ended September 30, 2021 from 3.38% for the nine months ended September 30, 2020.

These decreases were primarily due to declining interest-earning asset yields.

Contributing to the decline in asset yields was an increase in average cash balances of $355.6 million, earning just 0.11%, due to deposit growth associated with the PPP loan funds and consumer stimulus checks.

Provision for Credit Losses

The provision for credit losses decreased by $96.2 million, or 111.6%, to a current period credit of $10.0 million for the nine months ended September 30, 2021 from a provision expense of $86.2 million for the nine months ended September 30, 2020.

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prior year provision was impacted by COVID-19 and the uncertainty surrounding the possible negative effect on economic forecast s.

As such, the outsized provision in the prior year was driven by the estimated increase in possible future loan losses due to COVID-19.

The current period decrease was primarily due to continued improvements in economic forecasts compared to the uncertainty that existed in the prior year.

Annualized net charge-offs to average loans decreased to 0.19% for the nine months ended September 30, 2021 from 0.32% for the nine months ended September 30, 2020.

Additionally, classified assets declined by $73.4 million, or 16.0%, to $384.4 million, or 3.8% of loans outstanding at September 30, 2021 from $457.8 million, or 4.2% of loans outstanding at September 30, 2020.

In determining the amount of the current period provision, we considered current economic conditions, including but not limited to unemployment levels, bankruptcy filings, and changes in real estate values and the impact of these factors on the quality of our loan portfolio and historical loss experience.

Noninterest Income

Noninterest income increased by $15.7 million, or 15.7%, to $115.8 million for the nine months ended September 30, 2021 from $100.1 million for the nine months ended September 30, 2020.

This increase was primarily due to a $25.3 million pre-tax gain on the sale of our insurance business offered through Northwest Insurance Services, which closed April 30, 2021.

In addition, trust and other financial services income increased by $5.9 million, or 38.8%, to $21.1 million for the nine months ended September 30, 2021 from $15.2 million for the nine months ended September 30, 2020 as a result of increases in both trust and brokerage advisory services.

Partially offsetting this i ncrease was a $10.5 million, or 43.3 %, decrease in mortgage banking income due to the impact of less favorable secondary market pricing.

Additionally, service charges and fees decreased by $4.2 million, or 9.9%, due to the impact of the Durbin amendment on our interchange fees which came into effect in the second half of 2020.

Noninterest Expense

Noninterest expense increased by $4.0 million, or 1.6%, to $258.6 million for the nine months ended September 30, 2021, from $254.6 million for the nine months ended September 30, 2020.

This increase was primarily due to the increase in compensation and employee benefits expense of $15.0 million, or 11.5%, to $145.2 million for the nine months ended September 30, 2021 from $130.2 million for the nine months ended September 30, 2020 primarily due to increases in health insurance and other benefit costs, regular merit expense and the addition of MutualBank employees and other strategic personnel.

Processing expenses increased by $4.3 million, or 11.3%, to $42.1 million for the nine months ended September 30, 2021 from $37.9 million for the nine months ended September 30, 2020 as we continue to invest in technology and infrastructure and as activity-driven utilization fees for ATM, check card and online and mobile banking has increased.

Additionally, professional service expense increased by $4.2 million, or 47.6%, to $13.1 million for the nine months ended September 30, 2021 from $8.9 million for the nine months ended September 30, 2020 due primarily to utilization of third-party experts to assist with our digital strategy rollout.

Partially offsetting these increases, merger, asset disposition and restructuring expense decreased $12.9 million, or 95.3%, due to expenses incurred in the prior period as part of the MutualBank acquisition.

Additionally, other expenses decreased by $5.8 million, or 45.1%, primarily due to the decrease in the reserve for unfunded commitments.

The prior year was significantly impacted by the onset of COVID-19 and the uncertainty surrounding the possible negative effect on loan commitments and undrawn lines of credit.

The provision for income taxes increased by $29.2 million, or 349.8%, to $37.5 million for the nine months ended September 30, 2021 from $8.3 million for the nine months ended September 30, 2020.

This increase was primarily due to the increase in income before tax of $113.7 million, or 236.1%.

Professional services decreased $2.0 million, or 43.8%, to $2.6 million for the quarter ended March 31, 2022 from $4.6 million for the quarter ended March 31, 2021 due to the use of third-party experts to recruit talent and assist with our digital strategy rollout in the prior year.

Premises and occupancy costs decreased $1.0 million, or 11.5%, to $7.8 million for the quarter ended March 31, 2022 from $8.8 million for the quarter ended March 31, 2021 due primarily to the cost savings from the prior year branch optimization initiative.

In addition, there was an decrease in other expenses of $1.0 million for the quarter ended March 31, 2022 due primarily due to the increase in the discount rate used to calculate our pension liability and related pension expense.

Partially offsetting these decreases was a $1.4 million increase in merger, asset disposition and restructuring expense as a result of the branch optimization initiative announced during the fourth quarter of 2021.

The provision for income taxes decreased by $4.0 million, or 34.4%, to $7.6 million for the quarter ended March 31, 2022 from $11.6 million for the quarter ended March 31, 2021.

This decrease in income taxes was due to a decrease in income before taxes in the current year.

We anticipate our effective tax rate to be between 21.0% and 23.0% for the year ending December 31, 2022.

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Average Balance Sheet

3 unchanged sentences

Average balances are calculated using daily averages.

Quarter ended September 30,

balance Interest Avg.

cost (i) Average

balance Interest Avg.

Interest-earning assets:

Residential mortgage loans $ 2,959,794 25,398 3.43 % $ 3,176,436 28,769 3.62 %

Home equity loans 1,356,131 11,993 3.51 % 1,479,429 13,732 3.69 %

Consumer loans 1,728,563 16,220 3.72 % 1,437,828 15,851 4.39 %

Commercial real estate loans 3,205,839 35,305 4.31 % 3,306,386 36,887 4.37 %

Commercial loans 975,603 9,096 3.65 % 1,377,223 12,603 3.58 %

Loans receivable (a) (b) (d) (includes FTE adjustments of $537 and $600, respectively) 10,225,930 98,012 3.80 % 10,777,302 107,842 3.98 %

Mortgage-backed securities (c) 1,832,876 5,840 1.27 % 1,004,803 4,651 1.85 %

Investment securities (c) (d) (includes FTE adjustments of $189 and $254, respectively) 348,619 1,466 1.68 % 216,081 1,336 2.47 %

FHLB stock, at cost 21,607 71 1.31 % 25,595 218 3.39 %

Other interest-earning deposits 905,130 352 0.15 % 791,601 221 0.11 %

Total interest-earning assets (includes FTE adjustments of $726 and $854, respectively) 13,334,162 105,741 3.15 % 12,815,382 114,268 3.55 %

Noninterest-earning assets (e) 1,074,122 1,088,273

Total assets $ 14,408,284 $ 13,903,655

Liabilities and shareholders’ equity

Interest-bearing liabilities:

Savings deposits $ 2,271,365 603 0.11 % $ 2,015,604 648 0.13 %

Interest-bearing demand deposits 2,890,905 414 0.06 % 2,680,591 763 0.11 %

Money market deposit accounts 2,565,159 637 0.10 % 2,347,097 1,347 0.23 %

Time deposits 1,423,041 2,886 0.80 % 1,782,350 5,685 1.27 %

Borrowed funds (f) 131,199 154 0.47 % 419,375 411 0.55 %

Subordinated debentures (g) 123,513 1,277 4.10 % 1,340 306 N/M

Junior subordinated debentures 128,946 625 1.90 % 128,658 720 2.19 %

Total interest-bearing liabilities 9,534,128 6,596 0.27 % 9,375,015 9,880 0.42 %

Noninterest-bearing demand deposits (h) 3,058,819 2,703,266

Noninterest-bearing liabilities 244,402 284,440

Total liabilities 12,837,349 12,362,721

Shareholders’ equity 1,570,935 1,540,934

Total liabilities and shareholders’ equity $ 14,408,284 $ 13,903,655

Net interest income/Interest rate spread 99,145 2.87 % 104,388 3.13 %

Net interest-earning assets/Net interest margin $ 3,800,034 2.97 % $ 3,440,367 3.26 %

Ratio of interest-earning assets to interest-bearing liabilities 1.40X 1.37X

(a) Average gross loans includes loans held as available-for-sale and loans placed on nonaccrual status.

(b) Interest income includes accretion/amortization of deferred loan fees/expenses, which were not material.

(d) Interest income on tax-free investment securities and tax-free loans are presented on a fully taxable equivalent ("FTE") basis.

(e) Average balances include the effect of unrealized gains or losses on securities held as available-for-sale.

(f) Average balances include FHLB borrowings and collateralized borrowings.

(g) On September 9, 2020, the Company issued $125.0 million of 4.00% fixed-to-floating rate subordinated notes with a maturity of September 15, 2030.

(h) Average cost of deposits were 0.15% and 0.29%, respectively.

(i) Annualized.

Shown on a FTE basis.

The FTE basis adjusts for the tax benefit of income on certain tax exempt loans and investments using the federal statutory rate applicable to each period presented.

We believe this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.

GAAP basis yields were:

loans — 3.79% and 3.96%, respectively;

investment securities — 1.47% and 2.00%, respectively;

interest-earning assets — 3.13% and 3.52%, respectively.

GAAP basis net interest rate spreads were 2.86% and 3.10%, respectively;

and GAAP basis net interest margins were 2.95% and 3.23%, respectively.

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Rate/Volume Analysis

(in thousands)

The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected interest income and interest expense during the periods indicated.

Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) net change.

Changes that cannot be attributed to either rate or volume have been allocated to both rate and volume.

For the quarter ended September 30, 2021 vs.

Increase/(decrease) due to Total

increase/(decrease)

Interest-earning assets:

Loans receivable $ (4,841) (4,989) (9,830)

Mortgage-backed securities (1,449) 2,638 1,189

Investment securities (428) 558 130

FHLB stock, at cost (133) (14) (147)

Other interest-earning deposits 87 44 131

Total interest-earning assets (6,764) (1,763) (8,527)

Interest-bearing liabilities:

Savings deposits (115) 70 (45)

Interest-bearing demand deposits (382) 33 (349)

Money market deposit accounts (768) 58 (710)

Time deposits (2,085) (714) (2,799)

Borrowed funds 81 (338) (257)

Subordinated debt (292) 1,263 971

Junior subordinated debentures (97) 2 (95)

Total interest-bearing liabilities (3,658) 374 (3,284)

Net change in net interest income $ (3,106) (2,137) (5,243)

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Average Balance Sheet

(in thousands)

The following table sets forth certain information relating to the Company’s average balance sheet and reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated.

Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.

Average balances are calculated using daily averages.

Nine months ended September 30,

Quarter ended March 31,

balance Interest Avg.

22 unchanged sentences

Borrowed funds (f) 135,289 158 0.47 % 143,806 154 0.43 %

Subordinated debentures (g) 123,438 3,799 4.10 % 450 306 N/M

Subordinated debentures (g) 123,608 1,250 4.05 % 123,357 1,258 4.14 %

Junior subordinated debentures 129,077 651 2.02 % 128,817 642 1.99 %

26 unchanged sentences

and GAAP basis net interest margins were 2.73% and 3.16%, respectively.

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Rate/Volume Analysis

3 unchanged sentences

Changes that cannot be attributed to either rate or volume have been allocated to both rate and volume.

For the nine months ended September 30, 2021 vs.

For the quarter ended March 31, 2022 vs.

Increase/(decrease) due to Total

17 unchanged sentences

Net change in net interest income $ (8,033) (1,850) (9,883)

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis