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:
• 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;
• 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;
• 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, including with respect to service charges and fees;
• our ability to enter new markets successfully and capitalize on growth opportunities;
• 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;
• 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;
• 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;
• our ability to retain key employees; and
• our compensation expense associated with equity allocated or awards 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 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. 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. 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. We established a cross-functional working group to manage the LIBOR transition. A transition plan was created to identify and modify the Company’s loan and other financial instrument contracts that are impacted by LIBOR transition. The Company chose the Secured Overnight Financing Rate (“SOFR”) as its alternative replacement for LIBOR on both back-to-back swaps and variable rate loans. We have not offered LIBOR for any new contracts since December 31, 2021. We are continuing to evaluate the amendments on our financial statements, with no material impacts expected, and execute on our transition plan.
In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosure.” This ASU eliminates the accounting guidance for troubled debt restructurings, while enhancing disclosure requirements for certain loan modifications when a borrower is experiencing financial difficulty. This ASU also requires the disclosure of current period gross write-offs by year for origination for financing receivables. This guidance is effective for annual periods beginning after December 15, 2022, including interim periods within those years, with early adoption permitted. This ASU is applied prospectively to modifications and write-offs beginning on the first day of the fiscal year of adoption. An entity may elect to adopt a modified retrospective transition method on the recognition and measurement of the TDR guidance. We are currently in the process of evaluating the ASU and determining the impact on our financial statements.
Comparison of Financial Condition
Total assets at September 30, 2022 were $13.953 billion, a decrease of $548.4 million, or 3.8%, from $14.502 billion at December 31, 2021. This decrease in assets was due to decreases in total cash and cash equivalents and marketable securities, partially offset by an increase in loans receivable, as described in further detail below.
Total cash and cash equivalents decreased by $1.161 billion, or 90.7%, to $118.5 million at September 30, 2022 from $1.279 billion at December 31, 2021. This decrease was driven by organic loan growth and deposit outflow, described in further detail below, as well as the purchase of three small business equipment finance loan pools totaling $182.8 million and two one-to four-family jumbo mortgage loan packages totaling $188.3 million during the nine months ended September 30, 2022.
Total marketable securities decreased by $165.5 million, or 7.1%, to $2.151 billion at September 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. Additionally, the maturity and monthly cash flow of marketable securities was redeployed into higher interest-earning loan products.
Total loans receivable increased by $725.1 million, or 7.2%, to $10.742 billion at September 30, 2022, from $10.016 billion at December 31, 2021. This increase was due to organic loan growth as well as the purchases of small business equipment finance and one-to- four-family jumbo mortgage loan pools during the year. Our personal loan portfolio increased by $649.8 million, or 10.6%, to $6.803 billion at September 30, 2022, from $6.153 billion at December 31, 2021. Continued growth in our consumer indirect auto loans and fewer sales of residential mortgages into the secondary market contributed to the increase in total loans receivable.
Total deposits decreased by $422.8 million, or 3.4%, to $11.878 billion at September 30, 2022 from $12.301 billion at December 31, 2021. This decrease was primarily due to decreases in time and demand deposit accounts of $393.6 million, or 5.3%. 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.
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Total shareholders’ equity at September 30, 2022 was $1.460 billion, or $11.50 per share, a decrease of $123.8 million, or 7.8%, 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 $153.5 million due to an increase in unrealized losses in the available-for-sale investment portfolio as a result of rising interest rates. These decreases were partially offset by year-to-date earnings of $99.0 million, net of $76.1 million of cash dividend payments.
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 September 30, 2022
Actual Minimum capital requirements (1) Well capitalized requirements
Amount Ratio Amount Ratio Amount Ratio
Total capital (to risk weighted assets)
Northwest Bancshares, Inc. $ 1,722,817 16.290 % $ 1,110,459 10.500 % $ 1,057,580 10.000 %
Northwest Bank 1,518,737 14.373 % 1,109,455 10.500 % 1,056,624 10.000 %
Tier 1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,506,056 14.241 % 898,943 8.500 % 846,064 8.000 %
Northwest Bank 1,415,729 13.399 % 898,130 8.500 % 845,299 8.000 %
CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,380,796 13.056 % 740,306 7.000 % 687,427 6.500 %
Northwest Bank 1,415,729 13.399 % 739,636 7.000 % 686,805 6.500 %
Tier 1 capital (leverage) (to average assets)
Northwest Bancshares, Inc. 1,506,056 11.019 % 546,713 4.000 % 683,391 5.000 %
Northwest Bank 1,415,729 10.348 % 547,270 4.000 % 684,087 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 September 30, 2022 was 9.74%. We adjust liquidity levels in order to meet funding needs for deposit outflows, payment of real estate taxes and insurance on mortgage loan escrow accounts, repayment of borrowings and loan commitments. At September 30, 2022, Northwest had $3.502 billion of additional borrowing capacity available with the FHLB, including $250.0 million on an overnight line of credit which had a balance of $11.9 million at September 30, 2022, as well as $98.9 million of borrowing capacity available with the Federal Reserve Bank and $105.0 million with two correspondent banks.
Dividends
We paid $25.4 million in cash dividends during the quarters ended September 30, 2022 and 2021. The common stock dividend payout ratio (dividends declared per share divided by net income per diluted share) was 69.0% and 74.1% for the quarters ended September 30, 2022 and September 30, 2021, respectively, on dividends of $0.20 per share. On O ctober 24, 2022, the Board of Directors declared a cash dividend of $0.20 per share payable on November 14, 2022 to shareholders of record as of November 3, 2022. This represents the 112 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.
September 30, 2022 December 31, 2021
(in thousands)
Loans 90 days or more past due:
Residential mortgage loans $ 5,544 7,641
Home equity loans 1,779 4,262
Vehicle loans 1,935 1,635
Other consumer loans 453 765
Commercial real estate loans 8,558 23,489
Commercial real estate - owner occupied 263 574
Commercial loans 638 1,105
Total loans 90 days or more past due $ 19,170 39,471
Total real estate owned (REO) $ 450 873
Total loans 90 days or more past due and REO 19,620 40,344
Total loans 90 days or more past due to net loans receivable 0.18 % 0.40 %
Total loans 90 days or more past due and REO to total assets 0.14 % 0.28 %
Nonperforming assets:
Nonaccrual loans - loans 90 days or more past due $ 18,813 39,140
Nonaccrual loans - loans less than 90 days past due 64,814 119,331
Loans 90 days or more past due still accruing 357 331
Total nonperforming loans 83,984 158,802
Total nonperforming assets $ 84,434 159,675
Total nonaccrual loans to total loans 0.78 % 1.59 %
Nonaccrual TDR loans (1) $ 30,406 17,216
Accruing TDR loans 16,344 13,072
Total TDR loans $ 46,750 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 2021 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 September 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 increased by $7.6 million, or 7.4%, to $109.8 million, or 1.02% of total loans at September 30, 2022 from $102.2 million, or 1.02% of total loans, at December 31, 2021. Total classified loans decreased $125.4 million, or 34.5%, to $237.7 million at September 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 $83.6 million, or 0.78% of total loans receivable at September 30, 2022, decreased by $74.8 million, or 47.2%, 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. We experienced an annualized net recovery during the quarter ended September 30, 2022 of 0.14%, as a percentage of average loans, compared to a total net charge-off 0.20% as a percentage of average loans for the year ended December 31, 2021. The net recovery was primarily from the recovery of a previously charged-off commercial real estate loan.
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Comparison of Operating Results for the Quarters Ended September 30, 2022 and 2021
Net income for the quarter ended September 30, 2022 was $37.3 million, or $0.29 per diluted share, an increase of $2.2 million, or 6.4%, from net income of $35.1 million, or $0.27 per diluted share, for the quarter ended September 30, 2021. The increase in net income primarily resulted from a $14.3 million, or 14.6%, increase in net interest income, as well as a decrease in noninterest expense of $3.5 million, or 4.1%. These increases were partially offset by an increase in the provision for credit losses of $12.0 million, or 276.6%, a decrease in noninterest income of $2.4 million, or 8.2%, and a $1.2 million, or 11.0%, increase in income tax expense. Net income for the quarter ended September 30, 2022 represents annualized returns on average equity and average assets of 9.84% and 1.05%, respectively, compared to 8.86% and 0.97% for the same quarter last year. A further discussion of notable changes follows.
Interest Income
Total interest income increased $13.6 million, or 13.0%, to $118.6 million for the quarter ended September 30, 2022 from $105.0 million for the quarter ended September 30, 2021. This increase was due to an increase in the average yield earned on interest-earning assets to 3.58% for the quarter ended September 30, 2022 from 3.13% for the quarter ended September 30, 2021 due to the rising interest rate environment, as well as the change in our interest-earning asset mix. This was partially offset by a decline in the average balance of interest-earning assets of $177.9 million, or 1.3%, to $13.156 billion for the quarter ended September 30, 2022 from $13.334 billion for the quarter ended September 30, 2021, driven by a decrease in other interest-earning deposits.
Interest income on loans receivable increased by $9.5 million, or 9.7%, to $106.9 million for the quarter ended September 30, 2022 compared to $97.5 million for the quarter ended September 30, 2021. This increase in interest income was due to increases in both the average yield and average balance on loans receivable. The average yield increased to 4.05% for the quarter ended September 30, 2022 , from 3.79% from the quarter ended September 30, 2021 , due to the increase in market interest rates. The average balance of loans receivable increased by $254.6 million, or 2.5%, to $10.481 billion for the quarter ended September 30, 2022 from $10.226 billion for the quarter ended September 30, 2021 due to organic loan growth as well as the purchases of three small business equipment finance loan pools totaling $182.8 million and two one-to four-family jumbo mortgage loan packages totaling $188.3 million during the nine months ended September 30, 2022 .
Interest income on mortgage-backed securities increased by $2.8 million, or 48.7%, to $8.7 million for the quarter ended September 30, 2022 compared to $5.8 million for the quarter ended September 30, 2021. This increase was driven by an increase in the average yield on mortgage-backed securities to 1.72% for the quarter ended September 30, 2022 from 1.27% for the quarter ended September 30, 2021 due to the purchase of mortgage-backed securities with yields higher than the existing portfolio. Additionally, the average balance of mortgage-backed securities increased $186.8 million, or 10.2%, to $2.020 billion for the quarter ended September 30, 2022 from $1.833 billion for the quarter ended September 30, 2021. This increase in average balance was primarily a result of additional purchases as we deployed interest-earning deposits into higher yielding investments.
Interest income on investment securities increased by $270,000, or 21.1%, for the quarter ended September 30, 2022 to $1.5 million from $1.3 million for the quarter ended September 30, 2021. This increase was due to an increase in the average balance of investment securities by $40.1 million, or 11.5%, to $388.8 million for the quarter ended September 30, 2022 from $348.6 million for the quarter ended September 30, 2021. The average yield on investment securities increased to 1.59% for the quarter ended September 30, 2022 from 1.47% for the quarter ended September 30, 2021.
Dividends on FHLB stock increased by $77,000, or 108.5%, to $148,000 for the quarter ended September 30, 2022 from $71,000 for the quarter ended September 30, 2021. This increase was due to the average yield increasing to 4.19% for the quarter ended September 30, 2022 from 1.31% for the quarter ended September 30, 2021 due to increases in market interest rates. This was partially offset by a decrease in the average balance of FHLB stock of $7.6 million, or 35.1%, to $14.0 million for the quarter ended September 30, 2022 from $21.6 million for the quarter ended September 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.
Interest income on interest-earning deposits increased by $943,000 to $1.3 million for the quarter ended September 30, 2022 from $352,000 for the quarter ended September 30, 2021. This increase was driven by an increase in the average yield on interest-earning deposits to 2.00% for the quarter ended September 30, 2022 from 0.15% for the quarter ended September 30, 2021, due to the Federal Reserve Board raising targeted short-term interest rates. The average balance of interest-earning deposits decreased by $651.9 million, or 72.0%, to $253.2 million for the quarter ended September 30, 2022 from $905.1 million for the quarter ended September 30, 2021 as the Bank has deployed these funds into higher yielding loans and investments.
Interest Expense
Interest expense decreased by $729,000, or 11.1%, to $5.9 million for the quarter ended September 30, 2022 from $6.6 million for the quarter ended September 30, 2021. This decrease in interest expense was primarily due to the decrease in the average
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balance of interest-bearing deposits of $287.8 million, or 3.0%, to $9.246 billion for the quarter ended September 30, 2022 from $9.534 billion for the quarter ended September 30, 2021. Additionally, there was a decline in the average cost of interest-bearing liabilities, which decreased to 0.25% for the quarter ended September 30, 2022 from 0.27% for the quarter ended September 30, 2021. This decrease resulted from the overall change in the mix of deposit accounts as customers move from fixed-rate time deposits to more liquid deposit accounts. In addition, d espite a rising interest rate environment, we have been able to keep our cost of deposits stable.
Net Interest Income
Net interest income increased by $14.3 million, or 14.6%, to $112.7 million for the quarter ended September 30, 2022 from $98.4 million for the quarter ended September 30, 2021. This increase is attributable to the factors discussed above. Additionally, our interest rate spread increased to 3.33% for the quarter ended September 30, 2022 from 2.86% for the quarter ended September 30, 2021, and our net interest margin increased to 3.40% for the quarter ended September 30, 2022 from 2.95% for the quarter ended September 30, 2021, primarily due to rising interest-earning asset yields in response to recent increases in market interest rates.
Provision for Credit Losses
The provision for credit losses increased by $12.0 million, or 276.6%, to a current period provision expense of $7.7 million for the quarter ended September 30, 2022 from a negative provision of $4.4 million the quarter ended September 30, 2021. The current period provision was driven by loan portfolio growth during the current year as well as a deterioration in the economic forecasts utilized in our allowance for credit loss models. The credit to the provision in the prior year was driven by 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 to unemployment levels, expected economic growth, bankruptcy filings, and changes in real estate values and the impact of these factors on the quality of our loan portfolio and historical loss experience. We analyze the allowance for credit losses as described in the section entitled “ Allowance for Credit Losses. ” The provision that is recorded is sufficient, in our judgment, to bring this reserve to a level that reflects the current expected lifetime losses in our loan portfolio relative to loan mix, a reasonable and supportable economic forecast period, and historical loss experience at September 30, 2022.
Noninterest Income
Noninterest income decreased by $2.4 million, or 8.2%, to $26.8 million for the quarter ended September 30, 2022 from $29.2 million for the quarter ended September 30, 2021. This decrease was primarily due to a decline in our mortgage banking income of $3.2 million, or 80.6%, to $766,000 for the quarter ended September 30, 2022 from $3.9 million for the quarter ended September 30, 2021. This decrease reflects the impact of less favorable pricing in the secondary market, due primarily to the volatile interest rate environment, as well as decreased mortgage volumes. Partially offsetting this decrease was an increase in service charges and fees of $1.1 million, or 8.5%, to $14.3 million for the quarter ended September 30, 2022 compared to $13.2 million for the quarter ended September 30, 2021, as customer activity increased in 2022 after COVID-19 restricted behavior in the prior year.
Noninterest Expense
Noninterest expense decreased by $3.5 million, or 4.1%, to $82.6 million for the quarter ended September 30, 2022 from $86.1 million for the quarter ended September 30, 2021. Almost all expense categories decreased as the Company continues to focus on controlling costs and improving efficiency. Compensation and employee benefits decreased $2.4 million, or 4.8%, to $46.7 million for the quarter ended September 30, 2022 from $49.1 million for the quarter ended September 30, 2021, driven primarily by the branch consolidations completed in April 2022. Professional services decreased $932,000, or 21.7%, to $3.4 million for the quarter ended September 30, 2022 from $4.3 million for the quarter ended September 30, 2021 due to the use of third-party consulting services during the prior year. Offsetting these decreases was an increase in other expenses of $1.7 million, or 75.4%, to $3.9 million for the quarter ended September 30, 2022 from $2.2 million for the quarter ended September 30, 2021 due to an increase in our unfunded loan loss reserve associated with the origination of loans with current off balance sheet exposure.
Income Taxes
The provision for income taxes increased by $1.2 million, or 11.0%, to $12.0 million for the quarter ended September 30, 2022 from $10.8 million for the quarter ended September 30, 2021. This increase in income taxes was due to an increase in income before taxes in the current year. We anticipate our effective tax rate to be between 22.0% and 24.0% for the year ending December 31, 2022.
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Comparison of Operating Results for the Nine Months Ended September 30, 2022 and 2021
Net income for the nine months ended September 30, 2022 was $99.0 million, or $0.78 per diluted share, a decrease of $25.3 million, or 20.3%, from $124.3 million, or $0.97 per diluted share, for the nine months ended September 30, 2021. The decrease in net income resulted primarily from a decrease in noninterest income of $32.9 million, or 28.4%, as well as an increase in the provision for credit losses of $18.8 million, or 188.6% . These unfavorable fluctuations were partially offset by a $9.3 million, or 3.6%, decrease in noninterest expense, a $9.0 million, or 3.1%, increase in net interest income, and a decrease in income tax expense of $8.1 million, or 21.5%. Net income for the nine months ended September 30, 2022 represents annualized returns on average equity and average assets of 8.61% and 0.93%, respectively, compared to 10.67% and 1.17% for the nine months ended September 30, 2021. A further discussion of notable changes follows.
Interest Income
Total interest income increased by $5.4 million, or 1.7%, to $320.9 million for the nine months ended September 30, 2022 from $315.6 million for the nine months ended September 30, 2021. This increase is the result of increases in the average yield earned on interest-earning assets as well as the average balance of interest-earning assets, and specifically the change in our interest-earning asset mix. The average yield earned on interest-earning assets increased to 3.23% for the nine months ended September 30, 2022 from 3.20% for the nine months ended September 30, 2021 due to the recent rising interest rate environment. The average balance of interest-earning assets increased by $143.0 million, or 1.1%, to $13.301 billion for the nine months ended September 30, 2022 from $13.158 billion for the nine months ended September 30, 2021 p rimarily driven by growth in the mortgage-backed securities portfolio which offset the decreases in the average balance of loans receivable.
Interest income on loans receivable decreased by $4.4 million, or 1.5%, to $290.7 million for the nine months ended September 30, 2022 from $295.0 million for the nine months ended September 30, 2021. This decrease is attributed to a decrease in the average balance of loans receivable by $127.7 million, or 1.2%, to $10.182 billion for the nine months ended September 30, 2022 from $10.309 billion for the nine months ended September 30, 2021 due primarily to PPP loan forgiveness and the payoff of several classified commercial real estate loan relationships. The average yield remained consistent at 3.82% for the nine months ended September 30, 2022 and September 30, 2021.
Interest income on mortgage-backed securities increased by $6.5 million, or 41.2%, to $22.2 million for the nine months ended September 30, 2022 from $15.7 million for the nine months ended September 30, 2021. This increase is attributed to increases in both the average balance and the average yield of mortgage-backed securities. The average balance increased $332.9 million, or 20.3%, to $1.973 billion for the nine months ended September 30, 2022 from $1.640 billion for the nine months ended September 30, 2021. This increase was primarily a result of additional purchases as we deployed interest-earning deposits into higher yielding investments. Additionally, the average yiel d on mortgage-backed securities increased to 1.50% for the nine months ended September 30, 2022 from 1.28% for the nine months ended September 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 $523,000, or 13.9%, to $4.3 million for the nine months ended September 30, 2022 from $3.8 million for the nine months ended September 30, 2021. This increase is primarily attributable to an increase in the average balance of investment securities by $31.7 million, or 9.1%, to $379.9 million for the nine months ended September 30, 2022 from $348.2 million for the nine months ended September 30, 2021. Additionally, the average yield on investment securities increased to 1.51% for the nine months ended September 30, 2022 from 1.44% for the nine months ended September 30, 2021.
Dividends on FHLB stock decreased by $14,000, or 4.3%, to $311,000 for the nine months ended September 30, 2022 from $325,000 for the nine months ended September 30, 2021. This decrease was due to an $8.4 million, or 37.9%, decrease in the average balance of FHLB stock to $13.8 million for the nine months ended September 30, 2022 from $22.2 million for the nine months ended September 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 3.02% for the nine months ended September 30, 2022 from 1.95% for the nine months ended September 30, 2021 as the FHLB of Pittsburgh increased dividend rates on required stock holdings in relation to higher market interest rates.
Interest income on interest-earning deposits increased by $2.7 million to $3.4 million for the nine months ended September 30, 2022 from $727,000 for the nine months ended September 30, 2021. This increase is attributable to an increase in the average yield on interest-earning deposits to 0.60% for the nine months ended September 30, 2022 from 0.11% for the nine months ended September 30, 2021, as a result of increases in the targeted federal funds rate by the Federal Reserve. This was partially offset by a decrease in the average balance of interest-earning deposits by $85.5 million, or 10.2%, to $753.5 million for the nine months ended September 30, 2022 from $839.0 million for the nine months ended September 30, 2021 as we deployed funds into higher yielding investments.
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Interest Expense
Interest expense decreased by $3.7 million, or 17.5%, to $17.3 million for the nine months ended September 30, 2022 from $21.0 million for the nine months ended September 30, 2021. This decrease in interest expense was driven by decreases in both the average cost and the average balance of interest-bearing liabilities. The average cost of interest-bearing liabilities decreased to 0.25% for the nine months ended September 30, 2022 from 0.30% for the nine months ended September 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 0.87% for the nine months ended September 30, 2021 to 0.60% for the nine months ended September 30, 2022, as time deposits with higher rates matured and rolled into lower rate deposit products. This decrease in time deposits has contributed largely to a decrease in the average balance of interest-bearing liabilities of $50.1 million, or 0.5%, to $9.425 billion for the nine months ended September 30, 2022 from $9.475 billion for the nine months ended September 30, 2021.
Net Interest Income
Net interest income increased by $9.0 million, or 3.1%, to $303.6 million for the nine months ended September 30, 2022 from $294.6 million for the nine months ended September 30, 2021. This increase is attributable to the factors discussed above. Our interest rate spread and net interest margin both increased over the course of the year. Our interest rate spread increased to 2.98% for the nine months ended September 30, 2022 from 2.91% for the nine months ended September 30, 2021 and our net interest margin increased to 3.05% for the nine months ended September 30, 2022 from 2.99% for the nine months ended September 30, 2021. These increases were driven largely by increasing interest rates and a change in balance sheet mix.
Provision for Credit Losses
The provision for credit losses increased by $18.8 million, or 188.6%, to a current period provision expense of $8.8 million for the nine months ended September 30, 2022 from a negative provision of $10.0 million for the nine months ended September 30, 2021. The current period provision was driven primarily by growth within our loan portfolio as well as a deterioration in 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 0.02% for the nine months ended September 30, 2022 from 0.19% for the nine months ended September 30, 2021. Additionally, classified assets declined by $146.6 million, or 38.1%, to $237.7 million, or 2.21% of loans outstanding at September 30, 2022 from $384.4 million, or 3.77% of loans outstanding at September 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 September 30, 2022.
Noninterest Income
Noninterest income decreased by $32.9 million, or 28.4%, to $83.0 million for the nine months ended September 30, 2022 from $115.8 million for the nine months ended September 30, 2021. This decrease was primarily driven by the sale of our insurance business on April 30, 2021, resulting in a $25.3 million pre-tax gain during the prior nine month period. This insurance business sale in the prior year also resulted in a decrease in insurance commission income of $3.6 million from the nine months ended September 30, 2021. In addition, mortgage banking income decreased by $9.4 million, or 68.1%, due to the impact of less favorable secondary market pricing, as well as decreased mortgage volumes. Partially offsetting these decreases was a $2.7 million, or 7.1%, increase in service charges and fees to $41.1 million for the nine months ended September 30, 2022 from $38.3 million for the nine months ended September 30, 2021 due to increased customer activity in 2022 after COVID-19 restricted behavior in the prior year. In addition, other operating income increased $1.6 million, or 18.6%, to $10.4 million for the nine months ended September 30, 2022 from $8.8 million for the nine months ended September 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.
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Noninterest Expense
Noninterest expense decreased by $9.3 million, or 3.6%, to $249.3 million for the nine months ended September 30, 2022, from $258.6 million for the nine months ended September 30, 2021. Spread across almost all expense categories, this decrease was driven by a $3.8 million, or 29.3%, decrease in professional service expense to $9.3 million for the nine months ended September 30, 2022 from $13.1 million for the nine months ended September 30, 2021 due to the utilization of third-party experts to recruit talent, provide consulting services, and to assist with our digital strategy rollout during the prior year. Compensation and employee benefits expense decreased $3.5 million, or 2.4%, to $141.7 million for the nine months ended September 30, 2022 from $145.2 million for the nine months ended September 30, 2021 despite recognizing approximately $1.4 million of additional expense related to the acceleration of compensation and stock benefits upon the passing of our former Chief Executive Officer. This decrease in compensation and benefits as well as the $1.7 million, or 7.2%, decrease in premises and occupancy costs are due primarily to branch consolidations completed over the past two years. Processing expenses decreased $3.2 million, or 7.6%, to $38.9 million for the nine months ended September 30, 2022 from $42.1 million for the nine months ended September 30, 2021 due to the prior year investment in technology and infrastructure. Partially offsetting these decreases, was a $4.5 million, or 64.3%, 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.
Income Taxes
The provision for income taxes decreased by $8.1 million, or 21.5%, to $29.5 million for the nine months ended September 30, 2022 from $37.5 million for the nine months ended September 30, 2021. This decrease was primarily due to the decrease in income before tax of $33.3 million, or 20.6%. We anticipate our effective tax rate to be between 22.0% and 24.0% 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 September 30,
2022 2021
Average
balance Interest Avg.
yield/
cost (h) Average
balance Interest Avg.
yield/
cost (h)
Assets
Interest-earning assets:
Residential mortgage loans $ 3,331,173 29,414 3.53 % $ 2,959,794 25,398 3.43 %
Home equity loans 1,274,918 13,658 4.25 % 1,356,131 11,993 3.51 %
Consumer loans 1,981,754 17,256 3.45 % 1,728,563 16,220 3.72 %
Commercial real estate loans 2,842,597 34,158 4.70 % 3,205,839 35,305 4.31 %
Commercial loans 1,050,124 12,978 4.84 % 975,603 9,096 3.65 %
Loans receivable (a) (b) (d) (includes FTE adjustments of $521 and $537, respectively) 10,480,566 107,464 4.07 % 10,225,930 98,012 3.80 %
Mortgage-backed securities (c) 2,019,715 8,683 1.72 % 1,832,876 5,840 1.27 %
Investment securities (c) (d) (includes FTE adjustments of $215 and $189, respectively) 388,755 1,762 1.81 % 348,619 1,466 1.68 %
FHLB stock, at cost 14,028 148 4.19 % 21,607 71 1.31 %
Other interest-earning deposits 253,192 1,295 2.00 % 905,130 352 0.15 %
Total interest-earning assets (includes FTE adjustments of $736 and $726, respectively) 13,156,256 119,352 3.60 % 13,334,162 105,741 3.15 %
Noninterest-earning assets (e) 896,663 1,074,122
Total assets $ 14,052,919 $ 14,408,284
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Savings deposits $ 2,350,248 594 0.10 % $ 2,271,365 603 0.11 %
Interest-bearing demand deposits 2,794,338 360 0.05 % 2,890,905 414 0.06 %
Money market deposit accounts 2,620,850 692 0.10 % 2,565,159 637 0.10 %
Time deposits 1,110,906 1,511 0.54 % 1,423,041 2,886 0.80 %
Borrowed funds (f) 127,073 239 0.75 % 131,199 154 0.47 %
Subordinated debentures 113,695 1,149 4.04 % 123,513 1,277 4.10 %
Junior subordinated debentures 129,207 1,322 4.00 % 128,946 625 1.90 %
Total interest-bearing liabilities 9,246,317 5,867 0.25 % 9,534,128 6,596 0.27 %
Noninterest-bearing demand deposits (g) 3,093,490 3,058,819
Noninterest-bearing liabilities 209,486 244,402
Total liabilities 12,549,293 12,837,349
Shareholders’ equity 1,503,626 1,570,935
Total liabilities and shareholders’ equity $ 14,052,919 $ 14,408,284
Net interest income/Interest rate spread 113,485 3.35 % 99,145 2.87 %
Net interest-earning assets/Net interest margin $ 3,909,939 3.42 % $ 3,800,034 2.97 %
Ratio of interest-earning assets to interest- bearing liabilities 1.42X 1.40X
(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) Average cost of total deposits was 0.11% and 0.15%, 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 — 4.05% and 3.79%, respectively; investment securities — 1.59% and 1.47%, respectively; interest-earning assets — 3.58% and 3.13%, respectively. GAAP basis net interest rate spreads were 3.33% and 2.86%, respectively; and GAAP basis net interest margins were 3.40% and 2.95%, respectively.
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Rate/Volume Analysis
(in thousands)
The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) net change. Changes that cannot be attributed to either rate or volume have been allocated to both rate and volume.
For the quarter ended September 30, 2022 vs. 2021
Increase/(decrease) due to Total
increase/(decrease)
Rate Volume
Interest-earning assets:
Loans receivable $ 6,908 2,544 9,452
Mortgage-backed securities 2,061 782 2,843
Investment securities 116 180 296
FHLB stock, at cost 155 (78) 77
Other interest-earning deposits 4,188 (3,245) 943
Total interest-earning assets 13,428 183 13,611
Interest-bearing liabilities:
Savings deposits (56) 47 (9)
Interest-bearing demand deposits (65) 11 (54)
Money market deposit accounts 31 24 55
Time deposits (934) (441) (1,375)
Borrowed funds 92 (7) 85
Subordinated debt (19) (109) (128)
Junior subordinated debentures 693 4 697
Total interest-bearing liabilities (258) (471) (729)
Net change in net interest income $ 13,686 654 14,340
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Average Balance Sheet
(in thousands)
The following table sets forth certain information relating to the Company’s average balance sheet and reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are calculated using daily averages.
Nine months ended September 30,
2022 2021
Average
balance Interest Avg.
yield/
cost (h) Average
balance Interest Avg.
yield/
cost (h)
Assets
Interest-earning assets:
Residential mortgage loans $ 3,162,758 82,282 3.47 % $ 2,967,248 77,373 3.48 %
Home equity loans 1,282,045 37,443 3.90 % 1,389,367 37,039 3.55 %
Consumer loans 1,887,843 47,588 3.37 % 1,594,834 45,341 3.79 %
Commercial real estate loans 2,918,940 95,813 4.33 % 3,258,785 107,124 4.32 %
Commercial loans 929,942 28,981 4.11 % 1,099,010 29,640 3.54 %
Loans receivable (a) (b) (d) (includes FTE adjustments of $1,416 and $1,468, respectively) 10,181,528 292,107 3.84 % 10,309,244 296,517 3.83 %
Mortgage-backed securities (c) 1,972,694 22,201 1.50 % 1,639,749 15,720 1.28 %
Investment securities (c) (d) (includes FTE adjustments of $627 and $540, respectively) 379,850 4,923 1.73 % 348,193 4,313 1.65 %
FHLB stock, at cost 13,776 311 3.02 % 22,174 325 1.95 %
Other interest-earning deposits 753,482 3,447 0.60 % 838,997 727 0.11 %
Total interest-earning assets (includes FTE adjustments of $2,043 and $2,008, respectively) 13,301,330 322,989 3.25 % 13,158,357 317,602 3.22 %
Noninterest-earning assets (e) 941,947 1,094,117
Total assets $ 14,243,277 $ 14,252,474
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Savings deposits $ 2,348,944 1,758 0.10 % $ 2,215,553 1,818 0.11 %
Interest-bearing demand deposits 2,842,071 1,008 0.05 % 2,838,822 1,250 0.06 %
Money market deposit accounts 2,647,301 2,067 0.10 % 2,533,676 1,914 0.10 %
Time deposits 1,207,444 5,416 0.60 % 1,499,583 9,845 0.87 %
Borrowed funds (f) 131,368 563 0.57 % 135,369 458 0.45 %
Subordinated debentures 118,919 3,603 4.04 % 123,438 3,799 4.10 %
Junior subordinated debentures 129,142 2,893 2.95 % 128,882 1,903 1.94 %
Total interest-bearing liabilities 9,425,189 17,308 0.25 % 9,475,323 20,987 0.30 %
Noninterest-bearing demand deposits (g) 3,081,640 2,967,672
Noninterest-bearing liabilities 199,742 252,587
Total liabilities 12,706,571 12,695,582
Shareholders’ equity 1,536,706 1,556,892
Total liabilities and shareholders’ equity $ 14,243,277 $ 14,252,474
Net interest income/Interest rate spread 305,681 3.00 % 296,615 2.92 %
Net interest-earning assets/Net interest margin $ 3,876,141 3.07 % $ 3,683,034 3.01 %
Ratio of interest-earning assets to interest-bearing liabilities 1.41X 1.39X
(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) Average cost of total deposits was 0.11% and 0.16%, 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 — 3.82% and 3.82%, respectively; investment securities — 1.51% and 1.44%, respectively; interest-earning assets — 3.23% and 3.20%, respectively. GAAP basis net interest rate spreads were 2.98% and 2.91%, respectively; and GAAP basis net interest margins were 3.05% and 2.99%, 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 nine months ended September 30, 2022 vs. 2021
Increase/(decrease) due to Total
increase/(decrease)
Rate Volume
Interest-earning assets:
Loans receivable $ 449 (4,859) (4,410)
Mortgage-backed securities 2,713 3,768 6,481
Investment securities 204 406 610
FHLB stock, at cost 178 (192) (14)
Other interest-earning deposits 3,094 (374) 2,720
Total interest-earning assets 6,638 (1,251) 5,387
Interest-bearing liabilities:
Savings deposits (165) 105 (60)
Interest-bearing demand deposits (267) 25 (242)
Money market deposit accounts 28 125 153
Time deposits (3,032) (1,397) (4,429)
Borrowed funds 125 (20) 105
Subordinated debt (57) (139) (196)
Junior subordinated debentures 990 — 990
Total interest-bearing liabilities (2,378) (1,301) (3,679)
Net change in net interest income $ 9,016 50 9,066
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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.