What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-05 compared with 2022-05-06 · 246 added, 98 removed, 267 unchanged (56% of the section changed)

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

• inflation and changes in the interest rate environment that reduce our margins, our loan origination, or the fair value of financial instruments;

• 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;

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• 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;

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• the ability of third-party providers to perform their obligations to us;

• competition among depository and other financial institutions;

• competition among depository and other financial institutions, including with respect to service charges and fees;

• 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;

• our ability to manage 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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• 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 manage market risk, credit risk and operational risk;

• our ability to retain key employees;

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

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

Overview of Critical Accounting Policies Involving Estimates

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The following accounting standard updates issued by the FASB have not yet been adopted.

In March 2020, the FASB issued ASU No.

In March 2020, the FASB issued Accounting Standards Update ("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.

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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

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.

Total assets at June 30, 2022 were $14.155 billion, a decrease of $346.8 million, or 2.4%, from $14.502 billion at December 31, 2021.

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

Total cash and cash equivalents decreased by $774.7 million, or 60.6%, to $504.5 million at June 30, 2022 from $1.279 billion at December 31, 2021.

This decrease was driven by organic loan growth, described in further detail below, as well as the purchase of two small business equipment finance loan pools totaling $115.8 million and two one-to four-family jumbo mortgage loan packages totaling $188.3 million during the six months ended June 30, 2022.

Total marketable securities decreased by $28.8 million, or 1.2%, to $2.288 billion at June 30, 2022 from $2.317 billion at December 31, 2021.

This decrease was driven primarily by the rising interest rate environment which negatively impacted the fair market value of our available-for-sale portfolio.

Total loans receivable increased by $416.4 million, or 4.2%, to $10.433 billion at June 30, 2022, from $10.016 billion at December 31, 2021.

This increase was due to organic loan growth as well as the purchases of the small business equipment finance and one-to- four-family jumbo mortgage loan pools during the year.

Our personal loan banking portfolio increased by $416.5 million, or 6.8%, to $6.570 billion at June 30, 2022, from $6.153 billion at December 31, 2021.

In addition, continued growth in our consumer indirect auto loans and lower sales of residential mortgages into the secondary market contributed to the increase in total loans receivable.

Total deposits decreased by $233.9 million, or 1.9%, to $12.067 billion at June 30, 2022 from $12.301 billion at December 31, 2021.

This decrease was primarily due to decreases in time and demand deposit accounts of $294.7 million, or 4.0%.

We believe these decreases were primarily the result of customer spending activity returning to pre-pandemic levels at a time when inflationary pressures have caused higher prices and government stimulus programs have ended.

Total shareholders’ equity at June 30, 2022 was $1.495 billion, or $11.78 per share, a decrease of $89.0 million, or 5.6%, 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 $105.0 million due to an increase in unrealized losses in the available-for-sale investment portfolio due to rising interest rates, as well as a payment of cash dividends of $50.7 million for the six months ended June 30, 2022.

These decreases were partially offset by year-to-date earnings of $61.7 million.

Regulatory Capital

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

At March 31, 2022

At June 30, 2022

Actual Minimum capital requirements (1) Well capitalized requirements

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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%.

Northwest Bank’s liquidity ratio at June 30, 2022 was 13.6%.

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.

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.

At June 30, 2022, Northwest had $3.582 billion of additional borrowing capacity available with the FHLB, including $250.0 million on an overnight line of credit which had no balance at June 30, 2022, as well as $91.2 million of borrowing capacity available with the Federal Reserve Bank and $110.0 million with three correspondent banks.

We paid $25.4 million and $25.5 million in cash dividends during the quarters ended June 30, 2022 and 2021, respectively.

The common stock dividend payout ratio (dividends declared per share divided by net income per diluted share) was 76.9% and 52.6% for the quarters ended June 30, 2022 and June 30, 2021, respectively, on dividends of $0.20 per share for the quarters ended June 30, 2022 and June 30, 2021.

On July 20, 2022, the Board of Directors declared a cash dividend of $0.20 per share payable on August 15, 2022 to shareholders of record as of August 4, 2022.

This represents the 111 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.

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

(in thousands)

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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.

As part of the analysis as of June 30, 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.

The ACL decreased by $3.9 million, or 3.8%, to $98.4 million, or 0.94% of total loans at June 30, 2022 from $102.2 million, or 1.02% of total loans, at December 31, 2021.

Total classified loans decreased $85.8 million, or 23.6%, to $277.4 million at June 30, 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 year.

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.

Nonaccrual loans of $98.4 million, or 0.94% of total loans receivable at June 30, 2022, decreased by $60.1 million, or 37.9%, 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.

As a percentage of average loans, annualized net charge-offs decreased to 0.14% for the quarter ended June 30, 2022 compared to 0.20% for the year ended December 31, 2021.

Comparison of Operating Results for the Quarters Ended June 30, 2022 and 2021

Net income for the quarter ended June 30, 2022 was $33.4 million, or $0.26 per diluted share, a decrease of $15.5 million, or 31.7%, from net income of $49.0 million, or $0.38 per diluted share, for the quarter ended June 30, 2021.

The decrease in net income

primarily resulted from a decrease in noninterest income of $24.3 million, or 44.3% and an increase in the provision for credit losses of $2.6 million.

Partially offsetting these changes was a $4.5 million, or 4.7%, increase in net interest income, a decrease in noninterest expense of $1.5 million, or 1.8%, as well as a $5.3 million, or 34.9%, decrease in income tax expense.

Net income for the quarter ended June 30, 2022 represents annualized returns on average equity and average assets of 8.90% and 0.94%, respectively, compared to 12.58% and 1.37% 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.

Total interest income increased $3.3 million, or 3.3%, to $105.9 million for the quarter ended June 30, 2022 from $102.6 million for the quarter ended June 30, 2021.

This increase was due to an increase in the average balance of interest-earning assets of $94.9 million, or 0.7%, to $13.347 billion for the quarter ended June 30, 2022 from $13.252 billion for the quarter ended June 30, 2021, which was primarily driven by growth in the mortgage-backed securities portfolio and interest-earning deposits.

Additionally, the average yield earned on interest-earning assets increased to 3.18% for the quarter ended June 30, 2022 from 3.10% for the quarter ended June 30, 2021 due to the rising interest rate environment.

Interest income on loans receivable increased by $319,000, or 0.3%, to $95.6 million for the quarter ended June 30, 2022 compared to $95.3 million for the quarter ended June 30, 2021.

This increase in interest income was due to an increase in the average yield on loans receivable, to 3.77% for the quarter ended June 30, 2022 , from 3.71% from the quarter ended June 30, 2021 , due to the increase in market interest rates.

Partially offsetting this increase in yield was a decrease in the average balance of loans receivable by $139.5 million, or 1.4%, to $10.158 billion for the quarter ended June 30, 2022 from $10.297 billion for the quarter ended June 30, 2021 due primarily to $252.4 million of PPP loan forgiveness since June 30 of last year.

Interest income on mortgage-backed securities increased by $1.5 million, or 26.0%, to $7.2 million for the quarter ended June 30, 2022 compared to $5.7 million for the quarter ended June 30, 2021.

This increase was driven by an increase in the average balance of mortgage-backed securities of $196.1 million, or 11.2%, to $1.952 billion for the quarter ended June 30, 2022 from $1.756 billion for the quarter ended June 30, 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.

The average yield on mortgage-backed securities increased to 1.47% for the quarter ended June 30, 2022 from 1.29% for the quarter ended June 30, 2021 due to the purchase of mortgage-backed securities with yields higher than the existing portfolio.

Interest income on investment securities increased by $111,000, or 8.6%, for the quarter ended June 30, 2022 to $1.4 million from $1.3 million for the quarter ended June 30, 2021.

This increase was due to an increase in the average balance of investment securities by $12.5 million, or 3.4%, to $376.9 million for the quarter ended June 30, 2022 from $364.4 million for the quarter ended June 30, 2021.

The average yield on investment securities increased to 1.48% for the quarter ended June 30, 2022 from 1.41% for the quarter ended June 30, 2021.

Dividends on FHLB stock decreased by $56,000, or 40.6%, to $82,000 for the quarter ended June 30, 2022 from $138,000 for the quarter ended June 30, 2021.

This decrease was due to the decrease in the average balance of FHLB stock by $9.7 million, or 41.9%, to $13.4 million for the quarter ended June 30, 2022 from $23.1 million for the quarter ended June 30, 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.

The average yield increased slightly to 2.44% for the quarter ended June 30, 2022 from 2.40% for the quarter ended June 30, 2021.

Interest income on interest-earning deposits increased by $1.5 million to $1.7 million for the quarter ended June 30, 2022 from $192,000 for the quarter ended June 30, 2021.

This increase was driven by an increase in the average yield on interest-earning deposits to 0.79% for the quarter ended June 30, 2022 from 0.09% for the quarter ended June 30, 2021, due to the Federal Reserve Board raising targeted short-term interest rates.

Additionally, the average balance of interest-earning deposits increased by $35.4 million, or 4.4%, to $846.1 million for the quarter ended June 30, 2022 from $810.7 million for the quarter ended June 30, 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%,

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.

Interest expense decreased by $1.2 million, or 17.5%, to $5.6 million for the quarter ended June 30, 2022 from $6.8 million for the quarter ended June 30, 2021.

This decrease in interest expense was primarily due to the decline in the the average cost of interest-bearing liabilities, which decreased to 0.24% for the quarter ended June 30, 2022 from 0.29% for the quarter ended June 30, 2021.

This decrease resulted primarily from the decrease in the interest rate paid on deposit accounts in response to decreases in market interest rates as well as the overall change in the mix of deposit accounts as customers move from time deposits to more liquid accounts.

Additionally, the average balance of interest-bearing liabilities decreased by $45.7 million, or 0.5%, to $9.466 billion for the quarter ended June 30, 2022 from $9.512 billion for the quarter ended June 30, 2021.

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.

Net interest income increased by $4.5 million, or 4.7%, to $100.3 million for the quarter ended June 30, 2022 from $95.7 million for the quarter ended June 30, 2021.

This increase is attributable to the factors discussed above.

Additionally, our interest rate spread increased to 2.94% for the quarter ended June 30, 2022 from 2.82% for the quarter ended June 30, 2021, and our net interest margin increased to 3.05% for the quarter ended June 30, 2022 from 2.89% for the quarter ended June 30, 2021, primarily due to rising interest-earning asset yields in response to recent increases in market interest rates.

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.

The Company recorded a provision expense of $2.6 million for the quarter ended June 30, 2022 compared to no provision for credit losses during the quarter ended June 30, 2021.

The current period provision was driven by loan portfolio growth and the slower economic growth forecasts by Moodys.

T he lack of provision in the prior year was driven by the improvements in the economic forecasts compared to the uncertainty that existed in 2020 to the industries impacted by COVID-19.

In determining the amount of the current period provision, we considered current and forecasted economic conditions, including but not limited 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 income decreased by $24.3 million, or 44.3%, to $30.4 million for the quarter ended June 30, 2022 from $54.7 million for the quarter ended June 30, 2021.

This decrease was primarily driven by the sale of the insurance business during the quarter ended June 30, 2021, resulting in a $25.3 million pre-tax gain.

As a result of this sale, insurance commission income ceased during the second quarter last year resulting in a decrease of $1.0 million for the quarter ended June 30, 2022.

Also contributing to the decrease in noninterest income was a decrease in mortgage banking income of $1.7 million, or 43.4%, to $2.2 million for the quarter ended June 30, 2022 from $3.8 million for the quarter ended June 30, 2021 due to t he impact of less favorable pricing in the secondary market, as a result of the recent volatile interest rate environment.

Partially offsetting these decreases was an increase in other operating income of $2.2 million, or 83.6%, to $4.9 million for the quarter ended June 30, 2022 compared to $2.6 million for the quarter ended June 30, 2021.

This increase was driven by an increase in interest rate swap income as well as a gain of approximately $1.0 million from the sale of branch buildings associated with the previously announced consolidation of 20 branch office facilities.

S ervice charges and fees increased $929,000, or 7.3%, to $13.7 million for the quarter ended June 30, 2022 compared to $12.7 million for the quarter ended June 30, 2021, as customer activity increased in 2022 after COVID-19 restricted behavior in the prior year.

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.

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.

Noninterest expense decreased by $1.5 million, or 1.8%, to $84.8 million for the quarter ended June 30, 2022 from $86.3 million for the quarter ended June 30, 2021.

This decrease was due to a decline in a majority of the noninterest expense categories as we continue to emphasize efficiency initiatives.

Processing expenses decreased $2.2 million, or 14.5%, to $12.9 million for the quarter ended June 30, 2022 from $15.2 million for the quarter ended June 30, 2021 due to the investment in our technology and infrastructure during the prior year.

Professional services decreased $898,000, or 21.2%, to $3.3 million for the quarter ended June 30, 2022 from $4.2 million for the quarter ended June 30, 2021 due to the use of third-party experts to assist with our digital strategy rollout in the prior year.

Compensation and employee benefits decreased $821,000 to $48.1 million for the quarter ended June 30, 2022 from $48.9 million for the quarter ended June 30, 2021, despite recognizing approximately $1.4 million of additional expense related to the acceleration of compensation and stock benefits upon Mr.

Seiffert's passing.

The decrease in compensation and employee benefits was driven primarily by the branch consolidations completed in April.

Offsetting these decreases was an increase in other expenses of $3.8 million to $5.2 million for the quarter ended June 30, 2022 from $1.4 million for the quarter ended June 30, 2021 due to an increase in our unfunded loan loss reserve associated with the origination of loans with current off balance sheet exposure.

The provision for income taxes decreased by $5.3 million, or 34.9%, to $9.9 million for the quarter ended June 30, 2022 from $15.1 million for the quarter ended June 30, 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.

Comparison of Operating Results for the Six Months Ended June 30, 2022 and 2021

Net income for the six months ended June 30, 2022 was $61.7 million, or $0.49 per diluted share, a decrease of $27.5 million, or 30.8%, from $89.2 million, or $0.70 per diluted share, for the six months ended June 30, 2021.

The decrease in net income resulted primarily from a decrease in noninterest income of $30.5 million, or 35.2%, as well as an increase in the provision for credit losses of $6.8 million, or 120.4% , and a $5.3 million, or 2.7% decrease in net interest income.

Partially offsetting these unfavorable variances was a decrease in income tax expense of $9.3 million, or 34.7%, and a $5.8 million, or 3.3%, decrease in noninterest expense.

Net income for the six months ended June 30, 2022 represents annualized returns on average equity and average assets of 8.01% and 0.87%, respectively, compared to 11.61% and 1.27% for the six months ended June 30, 2021.

A further discussion of notable changes follows.

Interest Income

Total interest income decreased by $8.2 million, or 3.9%, to $202.3 million for the six months ended June 30, 2022 from $210.6 million for the six months ended June 30, 2021.

This decrease is the result of a decrease in the average yield earned on interest-earning assets to 3.05% for the six months ended June 30, 2022 from 3.23% for the six months ended June 30, 2021.

Despite the recent rising rate environment, loan yields are down year over year and have only started to rise during the quarter ended June 30, 2022.

Partially offsetting this decrease was an increase in the average balance of interest-earning assets by $301.4 million, or 2.3%, to $13.371 billion for the six months ended June 30, 2022 from $13.070 billion for the six months ended June 30, 2021 p rimarily driven by growth in the mortgage-backed securities portfolio and interest-earning deposits .

Interest income on loans receivable decreased by $13.8 million, or 7.0%, to $183.7 million for the six months ended June 30, 2022 from $197.6 million for the six months ended June 30, 2021.

This decrease is attributed to a decrease in the average balance of loans receivable by $322.1 million, or 3.1%, to $10.030 billion for the six months ended June 30, 2022 from $10.352 billion for the six months ended June 30, 2021 due primarily to PPP loan forgiveness and the payoff of several classified commercial real estate loan relationships.

Additionally, the average yield on loans receivable decreased to 3.69% for the six months ended June 30, 2022 from 3.83% for the six months ended June 30, 2021 despite the recent rise in market interest rates.

Interest income on mortgage-backed securities increased by $3.6 million, or 36.8%, to $13.5 million for the six months ended June 30, 2022 from $9.9 million for the six months ended June 30, 2021.

This increase is attributed to an increase in the average balance of mortgage-backed securities of $407.2 million, or 26.4%, to $1.949 billion for the six months ended June 30, 2022 from $1.542 billion for the six months ended June 30, 2021.

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

Additionally, the average yiel d on mortgage-backed securities increased to 1.39% for the six months ended June 30, 2022 from 1.28% for the six months ended June 30, 2021 due to the purchase of fixed rate mortgage-backed securities with yields higher than the existing portfolio.

Interest income on investment securities increased by $253,000, or 10.1%, to $2.7 million for the six months ended June 30, 2022 from $2.5 million for the six months ended June 30, 2021.

This increase is primarily attributable to an increase in the average balance of investment securities by $27.3 million, or 7.9%, to $375.3 million for the six months ended June 30, 2022 from $348.0 million for the six months ended June 30, 2021.

Additionally, the average yield on investment securities increased slightly to 1.46% for the six months ended June 30, 2022 from 1.43% for the six months ended June 30, 2021.

Dividends on FHLB stock decreased by $91,000, or 35.8%, to $163,000 for the six months ended June 30, 2022 from $254,000 for the six months ended June 30, 2021.

This decrease was due to an $8.8 million, or 39.2%, decrease in the average balance of FHLB stock to $13.6 million for the six months ended June 30, 2022 from $22.5 million for the six months ended June 30, 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.

Partially offsetting the decrease in the balance was an increase in the average yield on FHLB stock to 2.41% for the six months ended June 30, 2022 from 2.27% for the six months ended June 30, 2021 as the FHLB of Pittsburgh increased yields on required stock holdings due to higher market interest rates.

Interest income on interest-earning deposits increased by $1.8 million to $2.2 million for the six months ended June 30, 2022 from $375,000 for the six months ended June 30, 2021.

This increase is attributable to an increase in the average balance of interest-earning deposits by $197.7 million, or 24.5%, to $1.004 billion for the six months ended June 30, 2022 from $805.9 million for the six months ended June 30, 2021.

Additionally, the average yield on interest-earning deposits increased to 0.43% for the six months ended June 30, 2022 from 0.09% for the six months ended June 30, 2021, as a result of increases in the targeted federal funds rate by the Federal Reserve.

Interest Expense

Interest expense decreased by $3.0 million, or 20.5%, to $11.4 million for the six months ended June 30, 2022 from $14.4 million for the six months ended June 30, 2021.

This decrease in interest expense was driven by a decrease in the average cost of interest-bearing liabilities to 0.24% for the six months ended June 30, 2022 from 0.31% for the six months ended June 30, 2021.

This decrease resulted from decreases in the interest rate paid on deposits as well as the change in deposit mix as customers chose to move funds from fixed-rate time deposits to more liquid deposit accounts.

Despite a rising interest rate environment, we have been able to keep our cost of deposits stable.

Additionally, the yield on time deposits has continued to decrease, from 0.91% for the six months ended June 30, 2021 to 0.64% for the six months ended June 30, 2022, as time deposits with higher rates are maturing and rolling into lower rate deposit products.

Partially offsetting this decrease was an increase in the average balance of interest-bearing liabilities by $66.6 million, or 0.7%, to $9.512 billion for the six months ended June 30, 2022 from $9.445 billion for the six months ended June 30, 2021.

This increase in the average balance resulted from growth in deposits over the past year.

Net Interest Income

Net interest income decreased by $5.3 million, or 2.7%, to $190.9 million for the six months ended June 30, 2022 from $196.2 million for the six months ended June 30, 2021.

This decrease is attributable to the factors discussed above.

Our interest rate spread and net interest margin both decreased over the course of the year.

Our interest rate spread decreased to 2.81% for the six months ended June 30, 2022 from 2.92% for the six months ended June 30, 2021 and our net interest margin decreased to 2.86% for the six months ended June 30, 2022 from 3.00% for the six months ended June 30, 2021.

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

Provision for Credit Losses

The provision for credit losses increased by $6.8 million, or 120.4%, to a current period provision expense of $1.1 million for the six months ended June 30, 2022 from a negative provision of $5.6 million for the six months ended June 30, 2021.

The current period provision was driven by the current portfolio mix, changes to asset quality and classified assets and the most recent economic forecasts.

T he negative provision in the prior year was driven by the improvements in the economic forecasts compared to the uncertainty that existed in 2020 for industries impacted by COVID-19

Annualized net charge-offs to average loans decreased to 0.10% for the six months ended June 30, 2022 from 0.22% for the six months ended June 30, 2021.

Additionally, classified assets declined by $175.7 million, or 38.8%, to $277.4 million, or 2.66% of loans outstanding at June 30, 2022 from $453.1 million, or 4.39% of loans outstanding at June 30, 2021.

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.

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 June 30, 2022.

Noninterest Income

Noninterest income decreased by $30.5 million, or 35.2%, to $56.2 million for the six months ended June 30, 2022 from $86.7 million for the six months ended June 30, 2021.

This decrease was primarily driven by the sale of the insurance business on April 30, 2021, during the six months ended June 30, 2021, resulting in a $25.3 million pre-tax gain.

This insurance business sale in the prior year also resulted in a decrease in insurance commission income of $3.6 million from the six months ended June 30, 2021.

In addition, mortgage banking income decreased by $6.2 million, or 63.2%, due to the impact of less favorable secondary market pricing.

Partially offsetting these decreases were $1.6 million increases in both service charges and fees and other operating income.

Service charges and fees increased to $26.7 million for the six months ended June 30, 2022 from $25.1 million for the six months ended June 30, 2021 due to increased customer activity in 2022 after COVID-19 restricted behavior in the prior year.

Other operating income increased to $7.1 million for the six months ended June 30, 2022 from $5.5 million for the six months ended June 30, 2021 due to an increase in swap fee income as well as a gain of approximately $1.0 million from the sale of branch buildings associated with the previously announced consolidation of 20 branch office facilities.

Noninterest Expense

Noninterest expense decreased by $5.8 million, or 3.3%, to $166.8 million for the six months ended June 30, 2022, from $172.5 million for the six months ended June 30, 2021.

This decrease was driven by a $3.1 million, or 10.9%, decrease in processing expenses to $25.5 million for the six months ended June 30, 2022 from $28.6 million for the six months ended June 30, 2021 due to the prior year investment in technology and infrastructure.

Additionally, professional service expense decreased by $2.9 million, or 33.0%, to $5.9 million for the six months ended June 30, 2022 from $8.8 million for the six months ended June 30, 2021 due to utilization of third-party experts to recruit talent and to assist with our digital strategy rollout during the prior year.

Compensation and employee benefits expense decreased $1.1 million, or 1.2%, to $95.0 million for the six months ended June 30, 2022 from $96.1 million for the six months ended June 30, 2021 despite recognizing approximately $1.4 million of additional expense related to the acceleration of compensation and stock benefits upon Mr.

Seiffert's passing.

This decrease in compensation and benefits as well as the $1.1 million, or 7.1%, decrease in premises and occupancy costs are due primarily to branch consolidations completed over the past two years.

Partially offsetting these decreases, was a $2.8 million, or 59.1%, increase in other expenses due to an increase in the reserve for unfunded commitments resulting from the origination of loans with current off balance sheet exposure.

The provision for income taxes decreased by $9.3 million, or 34.7%, to $17.5 million for the six months ended June 30, 2022 from $26.7 million for the six months ended June 30, 2021.

This decrease was primarily due to the decrease in income before tax of $36.8 million, or 31.7%.

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

Average Balance Sheet

3 unchanged sentences

Average balances are calculated using daily averages.

Quarter ended March 31,

Quarter ended June 30,

balance Interest Avg.

cost (i) Average

cost (h) Average

balance Interest Avg.

20 unchanged sentences

Borrowed funds (f) 123,749 167 0.54 % 131,240 150 0.46 %

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

Subordinated debentures 119,563 1,203 4.03 % 123,443 1,264 4.11 %

Junior subordinated debentures 129,142 920 2.82 % 128,882 636 1.95 %

Total interest-bearing liabilities 9,465,991 5,631 0.24 % 9,511,668 6,823 0.29 %

Noninterest-bearing demand deposits (h) 3,060,698 2,805,206

Noninterest-bearing demand deposits (g) 3,090,372 3,036,202

Noninterest-bearing liabilities 193,510 247,930

11 unchanged sentences

(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.

(g) Average cost of deposits were 0.11% and 0.16%, respectively.

(h) Annualized.

Shown on a FTE basis.

12 unchanged sentences

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.

For the quarter ended June 30, 2022 vs.

Increase/(decrease) due to Total

17 unchanged sentences

Net change in net interest income $ 4,624 (118) 4,506

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.

Six months ended June 30,

balance Interest Avg.

cost (h) Average

balance Interest Avg.

Interest-earning assets:

Residential mortgage loans $ 3,077,155 52,868 3.44 % $ 2,971,037 51,975 3.50 %

Home equity loans 1,285,668 23,433 3.68 % 1,406,260 25,046 3.57 %

Consumer loans 1,840,110 30,684 3.36 % 1,526,861 29,121 3.82 %

Commercial real estate loans 2,957,744 61,601 4.14 % 3,285,696 71,820 4.32 %

Commercial loans 868,854 15,987 3.66 % 1,161,736 20,543 3.50 %

Loans receivable (a) (b) (d) (includes FTE adjustments of $825 and $932, respectively) 10,029,531 184,573 3.71 % 10,351,590 198,505 3.85 %

Mortgage-backed securities (c) 1,948,794 13,518 1.39 % 1,541,585 9,880 1.28 %

Investment securities (c) (d) (includes FTE adjustments of $381 and $351, respectively) 375,323 3,130 1.67 % 347,977 2,847 1.64 %

FHLB stock, at cost 13,648 163 2.41 % 22,462 254 2.27 %

Other interest-earning deposits 1,003,627 2,151 0.43 % 805,930 375 0.09 %

Total interest-earning assets (includes FTE adjustments of $1,206 and $1,283, respectively) 13,370,923 203,535 3.07 % 13,069,544 211,861 3.25 %

Noninterest-earning assets (e) 969,111 1,103,734

Total assets $ 14,340,034 $ 14,173,278

Liabilities and shareholders’ equity

Interest-bearing liabilities:

Savings deposits $ 2,348,282 1,181 0.10 % $ 2,187,184 1,215 0.11 %

Interest-bearing demand deposits 2,866,333 631 0.04 % 2,812,348 836 0.06 %

Money market deposit accounts 2,660,745 1,321 0.10 % 2,517,673 1,278 0.10 %

Time deposits 1,256,513 3,959 0.64 % 1,538,489 6,959 0.91 %

Borrowed funds (f) 129,487 324 0.50 % 137,488 303 0.44 %

Subordinated debentures 121,574 2,454 4.04 % 123,400 2,522 4.10 %

Junior subordinated debentures 129,109 1,571 2.42 % 128,850 1,278 1.96 %

Total interest-bearing liabilities 9,512,043 11,441 0.24 % 9,445,432 14,391 0.31 %

Noninterest-bearing demand deposits (g) 3,075,617 2,921,343

Noninterest-bearing liabilities 198,854 256,748

Total liabilities 12,786,514 12,623,523

Shareholders’ equity 1,553,520 1,549,755

Total liabilities and shareholders’ equity $ 14,340,034 $ 14,173,278

Net interest income/Interest rate spread 192,094 2.83 % 197,470 2.94 %

Net interest-earning assets/Net interest margin $ 3,858,880 2.87 % $ 3,624,112 3.02 %

Ratio of interest-earning assets to interest-bearing liabilities 1.41X 1.38X

(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) Average cost of deposits were 0.12% and 0.17%, respectively.

(h) 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 — 3.69% and 3.83%, respectively;

investment securities — 1.46% and 1.43%, respectively;

interest-earning assets — 3.05% and 3.23%, respectively.

GAAP basis net interest rate spreads were 2.81% and 2.92%, respectively;

and GAAP basis net interest margins were 2.86% and 3.00%, respectively.

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 six months ended June 30, 2022 vs.

Increase/(decrease) due to Total

increase/(decrease)

Interest-earning assets:

Loans receivable $ (6,914) (7,018) (13,932)

Mortgage-backed securities 813 2,825 3,638

Investment securities 55 228 283

FHLB stock, at cost 16 (107) (91)

Other interest-earning deposits 1,354 422 1,776

Total interest-earning assets (4,676) (3,650) (8,326)

Interest-bearing liabilities:

Savings deposits (108) 74 (34)

Interest-bearing demand deposits (212) 7 (205)

Money market deposit accounts (21) 64 43

Time deposits (2,073) (927) (3,000)

Borrowed funds 43 (22) 21

Subordinated debt (38) (30) (68)

Junior subordinated debentures 297 (4) 293

Total interest-bearing liabilities (2,112) (838) (2,950)

Net change in net interest income $ (2,564) (2,812) (5,376)

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