Item 2. Management’s Discussion and Analysis
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
In addition to historical information, this document may contain certain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, as they reflect management’s analysis only as of the date of this report. We have no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report.
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 (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;
• inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;
• adverse changes in the securities and credit markets;
• cyber-security concerns, including an interruption or breach in the security of our website or other information systems;
• technological changes that may be more difficult or expensive than expected;
• the ability of third-party providers to perform their obligations to us;
• competition among depository and other financial institutions;
• our ability to enter new markets successfully and capitalize on growth opportunities;
• 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;
• our ability to continue to increase and manage our commercial and personal loans;
• possible impairments of securities held by us, including those issued by government entities and government sponsored enterprises;
• the impact of the economy on our loan portfolio (including cash flow and collateral values), investment portfolio, customers and capital market activities;
• 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; and
• 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 Financial Accounting Standards Board (“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; and
• our compensation expense associated with equity allocated or aware to our employees.
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Overview of Critical Accounting Policies Involving Estimates
Please refer to Note 1 of the Notes to Consolidated Financial Statements in Item 8 of Part II of our 2021 Annual Report on Form 10-K.
Recently Issued Accounting Standards
The following accounting standard updates issued by the FASB have not yet been adopted.
In March 2020, the FASB issued ASU No. 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. 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. This guidance is effective as of March 12, 2020 through December 31, 2022. We are currently in the process of evaluating the amendments and determining the impact on our financial statements.
In January 2021, the FASB issued ASU No. 2021-01, “Reference Rate Reform.” This ASU provides amendments, which are elective, and apply to all entities that have derivative instruments that use an interest rate for margining, discounting or contract price alignment of certain derivative instruments that are modified as a result of the reference rate reform. This guidance is effective as of the date of issuance through December 31, 2022. 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 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
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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
Financial institutions and their holding companies are subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct, material effect on a company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, financial institutions must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting guidelines. Capital amounts and classifications are also subject to qualitative judgments made by the regulators about components, risk-weighting and other factors.
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.
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 March 31, 2022
Actual Minimum capital requirements (1) Well capitalized requirements
Amount Ratio Amount Ratio Amount Ratio
Total capital (to risk weighted assets)
Northwest Bancshares, Inc. $ 1,687,337 16.891 % $ 1,048,912 10.500 % $ 998,964 10.000 %
Northwest Bank 1,420,908 14.238 % 1,047,877 10.500 % 997,978 10.000 %
Tier 1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,480,958 14.825 % 849,119 8.500 % 799,171 8.000 %
Northwest Bank 1,338,199 13.409 % 848,281 8.500 % 798,382 8.000 %
CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,355,828 13.572 % 699,275 7.000 % 649,327 6.500 %
Northwest Bank 1,338,199 13.409 % 698,585 7.000 % 648,686 6.500 %
Tier 1 capital (leverage) (to average assets)
Northwest Bancshares, Inc. 1,480,958 10.431 % 567,907 4.000 % 709,884 5.000 %
Northwest Bank 1,338,199 9.428 % 567,749 4.000 % 709,686 5.000 %
(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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At December 31, 2021
Actual Minimum capital requirements (1) Well capitalized requirements
Amount Ratio Amount Ratio Amount Ratio
Total capital (to risk weighted assets)
Northwest Bancshares, Inc. $ 1,682,487 17.056 % $ 1,035,786 10.500 % $ 986,463 10.000 %
Northwest Bank 1,551,084 15.738 % 1,034,819 10.500 % 985,542 10.000 %
Tier I capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,475,190 14.954 % 838,494 8.500 % 789,170 8.000 %
Northwest Bank 1,467,362 14.889 % 837,711 8.500 % 788,434 8.000 %
CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,350,125 13.687 % 690,524 7.000 % 641,201 6.500 %
Northwest Bank 1,467,362 14.889 % 689,879 7.000 % 640,602 6.500 %
Tier I capital (leverage) (to average assets)
Northwest Bancshares, Inc. 1,475,190 10.349 % 570,160 4.000 % 712,699 5.000 %
Northwest Bank 1,467,362 10.296 % 570,047 4.000 % 712,558 5.000 %
(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).
Liquidity
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 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 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.
Dividends
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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Nonperforming Assets
The following table sets forth information with respect to nonperforming assets. Nonaccrual loans are those loans on which the accrual of interest has ceased. Generally, when a loan is 90 days past due, we fully reverse all accrued interest thereon and cease to accrue interest thereafter. Exceptions are made for loans that have contractually matured, are in the process of being modified to extend the maturity date and are otherwise current as to principal and interest, and well-secured loans that are in the process of collection. Loans may also be placed on nonaccrual before they reach 90 days past due if conditions exist that call into question our ability to collect all contractual interest. Other nonperforming assets represent property acquired through foreclosure or repossession. Foreclosed property is carried at the lower of its fair value less estimated costs to sell or the principal balance of the related loan.
March 31, 2022 December 31, 2021
(in thousands)
Loans 90 days or more past due:
Residential mortgage loans $ 3,976 7,641
Home equity loans 2,968 4,262
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 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
Total loans 90 days or more past due to net loans receivable 0.31 % 0.40 %
Total loans 90 days or more past due and REO to total assets 0.22 % 0.28 %
Nonperforming assets:
Nonaccrual loans - loans 90 days or more past due $ 30,920 39,140
Nonaccrual loans - loans less than 90 days past due 93,241 119,331
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
Accruing TDR loans 12,686 13,072
Total TDR loans $ 28,701 30,288
(1) Included in nonaccrual loans above.
Allowance for Credit Losses
We adopted CECL on January 1, 2020, as further described in Note 1(f) of the Notes to the Consolidated Financial Statements in Item 8 of Part II of our 20210 Annual Report on Form 10-K. Our Board of Directors has adopted an “Allowance for Credit Losses” policy designed to provide management with a systematic methodology for determining and documenting the allowance for credit losses each reporting period. This methodology was developed to provide a consistent process to ensure that the allowance for credit losses is in conformity with GAAP, our policies and procedures and other supervisory and regulatory guidelines.
On an ongoing basis, the Credit Administration department, as well as loan officers, branch managers and department heads, review and monitor the loan portfolio for problem loans. This portfolio monitoring includes a review of the monthly delinquency reports as well as historical comparisons and trend analysis. Personal and small business commercial loans are classified primarily by delinquency status. In addition, a meeting is held every quarter with each region to monitor the performance and status of commercial loans on an internal watch list. On an on-going basis, the loan officer, in conjunction with a portfolio manager, grades or classifies problem commercial loans or potential problem commercial loans based upon their knowledge of the lending relationship and other information previously accumulated. This rating is also reviewed independently by our Loan Review department on a periodic basis. Our loan grading system for problem commercial loans is consistent with industry regulatory guidelines which classifies loans as “substandard”, “doubtful” or “loss.” Loans that do not expose us to risk sufficient to warrant classification in one of the previous categories, but which possess some weaknesses, are designated as “special mention”. 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,
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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.
Credit relationships that have been classified as substandard or doubtful and are greater than or equal to $1.0 million are reviewed by the Credit Administration department to determine if they no longer continue to demonstrate similar risk characteristics to their loan pool. If a loan no longer demonstrates similar risk characteristics to their loan pool they are removed from the pool and an individual assessment will be performed.
If it is determined that a loan needs to be individually assessed, the Credit Administration department determines the proper measure of fair value for each loan based on one of three methods: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent, less costs of sale or disposal. If the measurement of the fair value of the loan is more or less than the amortized cost basis of the loan, the Credit Administration department adjusts the specific allowance associated with that individual loan accordingly.
If a substandard or doubtful loan is not individually assessed, it is grouped with other loans that possess common characteristics for credit losses and analysis. For the purpose of calculating reserves, we have grouped our loans into seven segments: residential mortgage loans, home equity loans, vehicle loans, consumer loans, commercial real estate loans, commercial real estate loans - owner occupied and commercial loans. The allowance for credit losses is measured using a combination of statistical models and qualitative assessments. We use a twenty four month forecasting period and revert to historical average loss rates thereafter. Reversion to average loss rates takes place over twelve months. Historical average loss rates are calculated using historical data beginning in October 2009 through the current period.
The credit losses for individually assessed loans along with the estimated loss for each homogeneous pool are consolidated into one summary document. This summary schedule along with the support documentation used to establish this schedule is presented to management’s Allowance for Credit Loss Committee (“ACL Committee”) monthly. The ACL Committee reviews and approves the processes and ACL documentation presented. Based on this review and discussion, the appropriate amount of ACL is estimated and any adjustments to reconcile the actual ACL with this estimate are determined. The ACL Committee also considers if any changes to the methodology are needed. In addition to the ACL Committee’s review and approval, a review is performed by the Risk Management Committee of the Board of Directors on a quarterly basis and annually by internal audit.
In addition to the reviews by management’s ACL Committee and the Board of Directors’ Risk Management Committee, regulators from either the FDIC and/or the Pennsylvania Department of Banking and Securities perform an extensive review on at least an annual basis for the adequacy of the ACL and its conformity with regulatory guidelines and pronouncements. Any recommendations or enhancements from these independent parties are considered by management and the ACL Committee and implemented accordingly.
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 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 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 $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 $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
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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 $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 $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. 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. 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 $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%,
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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 $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 2.66% 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 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 March 31, 2022.
Noninterest Income
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 $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. 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.
Income Taxes
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
(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.
Quarter ended March 31,
2022 2021
Average
balance Interest Avg.
yield/
cost (i) Average
balance Interest Avg.
yield/
cost (i)
Assets
Interest-earning assets:
Residential mortgage loans $ 2,980,788 25,542 3.43 % $ 3,007,439 26,366 3.51 %
Home equity loans 1,293,986 11,472 3.60 % 1,432,009 12,815 3.63 %
Consumer loans 1,799,037 14,907 3.36 % 1,463,284 14,566 4.04 %
Commercial real estate loans 3,000,204 29,757 3.97 % 3,313,892 38,471 4.64 %
Commercial loans 824,770 6,897 3.34 % 1,189,812 10,566 3.55 %
Loans receivable (a) (b) (d) (includes FTE adjustments of $401 and $600, respectively) 9,898,785 88,575 3.63 % 10,406,436 102,784 4.01 %
Mortgage-backed securities (c) 1,945,173 6,360 1.31 % 1,324,558 4,200 1.27 %
Investment securities (c) (d) (includes FTE adjustments of $189 and $254, respectively) 373,694 1,540 1.65 % 331,358 1,381 1.67 %
FHLB stock, at cost 13,870 81 2.38 % 21,811 116 2.17 %
Other interest-earning deposits 1,218,960 467 0.15 % 801,119 183 0.09 %
Total interest-earning assets (includes FTE adjustments of $590 and $854, respectively) 13,450,482 97,023 2.93 % 12,885,282 108,664 3.42 %
Noninterest-earning assets (e) 973,092 1,102,477
Total assets $ 14,423,574 $ 13,987,759
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Savings deposits $ 2,334,494 592 0.10 % $ 2,118,030 625 0.12 %
Interest-bearing demand deposits 2,875,430 321 0.05 % 2,783,429 429 0.06 %
Money market deposit accounts 2,668,105 653 0.10 % 2,497,495 657 0.11 %
Time deposits 1,292,608 2,185 0.69 % 1,583,525 3,803 0.97 %
Borrowed funds (f) 135,289 158 0.47 % 143,806 154 0.43 %
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 %
Total interest-bearing liabilities 9,558,611 5,810 0.25 % 9,378,459 7,568 0.33 %
Noninterest-bearing demand deposits (h) 3,060,698 2,805,206
Noninterest-bearing liabilities 203,537 265,667
Total liabilities 12,822,846 12,449,332
Shareholders’ equity 1,600,728 1,538,427
Total liabilities and shareholders’ equity $ 14,423,574 $ 13,987,759
Net interest income/Interest rate spread 91,213 2.68 % 101,096 3.09 %
Net interest-earning assets/Net interest margin $ 3,891,871 2.75 % $ 3,506,823 3.18 %
Ratio of interest-earning assets to interest- bearing liabilities 1.41X 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.
(c) Average balances do not include the effect of unrealized gains or losses on securities held as available-for-sale.
(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 0.12% and 0.19%, 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 — 3.61% and 3.99%, respectively; investment securities — 1.45% and 1.46%, respectively; interest-earning assets — 2.91% and 3.40%, respectively. GAAP basis net interest rate spreads were 2.66% and 3.07%, respectively; and GAAP basis net interest margins were 2.73% and 3.16%, 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 March 31, 2022 vs. 2021
Increase/(decrease) due to Total
increase/(decrease)
Rate Volume
Interest-earning assets:
Loans receivable $ (9,666) (4,543) (14,209)
Mortgage-backed securities 130 2,030 2,160
Investment securities (16) 175 159
FHLB stock, at cost 11 (46) (35)
Other interest-earning deposits 124 160 284
Total interest-earning assets (9,417) (2,224) (11,641)
Interest-bearing liabilities:
Savings deposits (88) 55 (33)
Interest-bearing demand deposits (118) 10 (108)
Money market deposit accounts (46) 42 (4)
Time deposits (1,126) (492) (1,618)
Borrowed funds 14 (10) 4
Subordinated debt (28) 20 (8)
Junior subordinated debentures 8 1 9
Total interest-bearing liabilities (1,384) (374) (1,758)
Net change in net interest income $ (8,033) (1,850) (9,883)
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.