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Item 2. Management’s Discussion and Analysis

2023-08-04 compared with 2023-05-05 · 239 added, 101 removed, 256 unchanged (57% of the section changed)

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• 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;

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

• 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;

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• 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;

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

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

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

• the disruption to local, regional, national and global economic activity caused by infectious disease outbreaks, and the significant impact that any such outbreaks may have on our growth, operations and earnings;

• our ability to retain key employees;

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

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

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 2022 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 was effective as of March 12, 2020 through December 31, 2022.

In December 2022, the FASB issued ASU No.

2022-06, “Reference Rate Reform (Topic 848):

Deferral of the Sunset Date to Topic 848”.

This guidance extends the guidance of ASU 2022-04 from December 31, 2022 to December 31, 2024.

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.

Comparison of Financial Condition

Total assets at March 31, 2023 were $14.194 billion, an increase of $80.5 million, or 0.6%, from $14.113 billion at December 31, 2022.

Total assets at June 30, 2023 were $14.291 billion, an increase of $178.2 million, or 1.3%, from $14.113 billion at December 31, 2022.

This increase in assets was driven by an increase in loans receivable, partially offset by decreases in both cash and cash equivalents and marketable securities.

A discussion of significant changes follows.

Total cash and cash equivalents decreased by $42.9 million, or 30.8%, to $96.5 million at March 31, 2023 from $139.4 million at December 31, 2022.

Total cash and cash equivalents decreased by $11.7 million, or 8.4%, to $127.6 million at June 30, 2023 from $139.4 million at December 31, 2022.

This decrease was primarily driven by organic loan growth.

Total marketable securities decreased by $27.8 million, or 1.3%, to $2.072 billion at March 31, 2023 from $2.099 billion at December 31, 2022.

Held-to-maturity securities decreased $15.2 million and available-for-sale marketable securities decreased $12.6 million due to the maturity and the monthly cash flows from marketable securities being redeployed into higher interest-earning products.

Gross loans receivable increased by $171.8 million, or 1.6%, to $11.092 billion at March 31, 2023, from $10.920 billion at December 31, 2022.

Total marketable securities decreased by $177.6 million, or 8.5%, to $1.922 billion at June 30, 2023 from $2.099 billion at December 31, 2022.

Held-to-maturity securities decreased $33.4 million and available-for-sale marketable securities decreased $144.2 million.

These decreases were driven by the maturity and the monthly cash flows from marketable securities, in addition to the sale of approximately $110.0 million of available-for-sale investment securities during the quarter in order to reallocate these funds into higher interest-earning products.

Gross loans receivable increased by $350.8 million, or 3.2%, to $11.271 billion at June 30, 2023, from $10.920 billion at December 31, 2022.

This increase was attributable to organic loan growth.

Our commercial and industrial (C&I) loan portfolio increased by $114.1 million, or 10.1%, to $1.246 billion at March 31, 2023, from $1.132 billion at December 31, 2022, and our consumer portfolio, comprised primarily of indirect automobile loans, increased by $63.5 million, or 2.9%, to $2.232 billion at March 31, 2023 compared to $2.169 billion at December 31, 2022.

Total deposits increased by $72.6 million, or 0.6%, to $11.537 billion at March 31, 2023 from $11.465 billion at December 31, 2022.

This increase was primarily driven by a $524.5 million, or 49.8%, increase in time deposits due to customer preferences for this fixed maturity product in a higher interest rate environment.

Partially offsetting this increase were decreases in demand deposit accounts of $242.1 million, or 4.3%, as we believe customers used funds during the period of higher inflationary costs.

In addition, savings and money market deposits decreased by $209.8 million, or 4.4%, due to customers choosing higher yielding product alternatives.

Total shareholders’ equity at March 31, 2023 was $1.513 billion, or $11.91 per share, an increase of $21.8 million, or 1.5%, from $1.491 billion, or $11.74 per share, at December 31, 2022.

This increase was the result of quarterly earnings of $33.7 million, as well as a decrease in accumulated other comprehensive loss of $12.6 million due to a decrease in unrealized losses in the available-for-sale investment portfolio as a result of the current rate environment.

These increases were partially offset by a $25.4 million payment of cash dividends.

Our commercial loan portfolio increased by $271.8 million, or 24.0%, to $1.404 billion at June 30, 2023, from $1.132 billion at December 31, 2022, primarily as a result of the new lending verticals that we recently implemented.

Our commercial real estate loan portfolio increased by $71.7 million, or 2.5%, to $2.895 billion at June 30, 2023, from $2.824 billion at December 31, 2022, and our consumer portfolio, comprised primarily of indirect automobile loans, increased by $32.4 million, or 1.5%, to $2.201 billion at June 30, 2023 compared to $2.169 billion at December 31, 2022.

Total deposits increased by $197.8 million, or 1.7%, to $11.662 billion at June 30, 2023 from $11.465 billion at December 31, 2022.

This increase was driven by a $937.4 million, or 89.1%, increase in time deposits due to customer preferences for this fixed maturity product in a higher interest rate environment.

Partially offsetting this increase were decreases in savings and money market deposits of $458.1 million, or 9.7%, due to customers choosing higher yielding product alternatives.

In addition, demand deposit accounts decreased by $281.5 million, or 5.0%, as we believe customers used funds during the period of higher inflationary costs.

Total shareholders’ equity at June 30, 2023 was $1.512 billion, or $11.89 per share, an increase of $20.0 million, or 1.3%, from $1.491 billion, or $11.74 per share, at December 31, 2022.

This increase was the result of year-to-date earnings of $66.7 million, partially offset by $50.8 million of cash dividend payments for the six months ended June 30, 2023.

Regulatory Capital

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

At March 31, 2023

At June 30, 2023

Actual Minimum capital requirements (1) Well capitalized requirements

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Northwest frequently 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, 2023 was 10.71%.

Northwest Bank’s liquidity ratio at June 30, 2023 was 9.91%.

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, 2023, Northwest had $3.041 billion of additional borrowing capacity available with the FHLB, including $250.0 million on an overnight line of credit which had a drawn balance of $183.7 million at March 31, 2023, as well as $304.6 million of borrowing capacity available with the Federal Reserve Bank and $105.0 million with two correspondent banks.

We paid $25.4 million and $25.3 million in cash dividends during the quarters ended March 31, 2023 and 2022, respectively.

The common stock dividend payout ratio (dividends declared per share divided by net income per diluted share) was 76.9% and 90.9% for the quarters ended March 31, 2023 and March 31, 2022, respectively, on dividends of $0.20 per share.

On April 19, 2023, the Board of Directors declared a cash dividend of $0.20 per share payable on May 15, 2023 to shareholders of record as of May 4, 2023.

At June 30, 2023, Northwest had $3.154 billion of additional borrowing capacity available with the FHLB, including $250.0 million on an overnight line of credit, which had a drawn balance of $28.0 million at June 30, 2023, as well as $308.6 million of borrowing capacity available with the Federal Reserve Bank and $105.0 million with two correspondent banks.

We paid $25.4 million in cash dividends during the quarters ended June 30, 2023 and 2022.

The common stock dividend payout ratio (dividends declared per share divided by net income per diluted share) was 76.9% for both quarters on dividends of $0.20 per share.

On July 19, 2023, the Board of Directors declared a cash dividend of $0.20 per share payable on August 14, 2023 to shareholders of record as of August 3, 2023.

This represents the 115 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, 2023 December 31, 2022

June 30, 2023 December 31, 2022

(in thousands)

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(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.

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.

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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, 2023, 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, 2023, 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 $3.2 million, or 2.7%, to $121.3 million, or 1.09% of total loans at March 31, 2023 from $118.0 million, or 1.08% of total loans, at December 31, 2022.

This increase was the result of continued deterioration in economic forecasts as well as organic loan growth.

Total classified loans decreased $27.6 million, or 11.7%, to $208.6 million at March 31, 2023 from $236.2 million at December 31, 2022.

This decrease was primarily driven by upgrades and payoffs of loans in our commercial real estate portfolio during the current quarter.

The ACL increased by $6.4 million, or 5.4%, to $124.4 million, or 1.10% of total loans at June 30, 2023 from $118.0 million, or 1.08% of total loans, at December 31, 2022.

This increase was the result of growth within our commercial loan portfolio during the year, as well as forecasted economic deterioration in our allowance for credit loss models.

Total classified loans decreased $22.1 million, or 9.4%, to $214.1 million at June 30, 2023 from $236.2 million at December 31, 2022.

This decrease was primarily driven by upgrades and payoffs 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 $78.6 million, or 0.71% of total loans receivable at March 31, 2023, decreased by $2.6 million, or 3.2%, from $81.2 million, or 0.74% of total loans receivable at December 31, 2022.

Nonaccrual loans of $78.6 million, or 0.70% of total loans receivable at June 30, 2023, decreased by $2.6 million, or 3.3%, from $81.2 million, or 0.74% of total loans receivable at December 31, 2022.

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

As a percentage of average loans, annualized net charge-offs increased to 0.08% for the quarter ended March 31, 2023 compared to 0.02% for the year ended December 31, 2022 due to several large recoveries during 2022.

Comparison of Operating Results for the Quarters Ended March 31, 2023 and 2022

Net income for the quarter ended March 31, 2023 was $33.7 million, or $0.26 per diluted share, an increase of $5.4 million, or 19.1%, from net income of $28.3 million, or $0.22 per diluted share, for the quarter ended March 31, 2022.

The increase in net income resulted primarily from an increase in net interest income of $21.8 million, or 24.1%, partially offset by increases in noninterest expense, the provision for credit losses, and the provision for income tax expense.

Noninterest expense increased $7.1 million, or 8.8%, the provision for credit losses increased $4.9 million, and the provision for income tax expense increased $2.7 million, or 35.4%.

Additionally, noninterest income decreased $1.8 million, or 6.9%.

Net income for the quarter ended March 31, 2023 represents annualized returns on average equity and average assets of 9.11% and 0.97%, respectively, compared to 7.17% and 0.80% for the same quarter last year.

As a percentage of average loans, annualized net charge-offs increased to 0.10% for the quarter ended June 30, 2023 compared to 0.02% for the year ended December 31, 2022 due to several large recoveries during 2022.

Comparison of Operating Results for the Quarters Ended June 30, 2023 and 2022

Net income for the quarter ended June 30, 2023 was $33.0 million, or $0.26 per diluted share, a decrease of $382,000, or 1.1%, from net income of $33.4 million, or $0.26 per diluted share, for the quarter ended June 30, 2022.

The decrease in net income resulted primarily from increases in noninterest expense and the provision for credit losses.

Noninterest expense increased $4.4 million, or 5.5%, and the provision for credit losses increased $2.9 million, or 48.2%.

These changes were partially offset by an increase in net interest income of $8.3 million, or 8.3%.

Net income for the quarter ended June 30, 2023 represents annualized returns on average equity and average assets of 8.72% and 0.93%, respectively, compared to 8.90% and 0.94% for the same quarter last year.

A further discussion of notable changes follows.

Interest Income

Total interest income increased $38.5 million, or 39.9%, to $134.9 million for the quarter ended March 31, 2023 from $96.4 million for the quarter ended March 31, 2022.

Total interest income increased by $38.1 million, or 36.0%, to $144.0 million for the quarter ended June 30, 2023 from $105.9 million for the quarter ended June 30, 2022.

This increase is attributable to an increase in the average yield earned on interest-earning assets as well as the change in our interest-earning asset mix.

The average yield earned on interest-earning assets increased to 4.13% for the quarter ended March 31, 2023 from 2.91% for the quarter ended March 31, 2022 due to the continued rising interest rate environment.

This was partially offset by a decline in the average balance of interest-earning assets of $198.6 million, or 1.5%, to $13.252 billion for the quarter ended March 31, 2023 from $13.450 billion for the quarter ended March 31, 2022, primarily driven by a decrease in other interest-earning deposits, offset by an increase in the average balance of loans receivable, described further below.

Interest income on loans receivable increased by $35.6 million, or 40.3%, to $123.7 million for the quarter ended March 31, 2023 compared to $88.2 million for the quarter ended March 31, 2022.

The average yield earned on interest-earning assets increased to 4.32% for the quarter ended June 30, 2023 from 3.18% for the quarter ended June 30, 2022 due to the continued rising interest rate environment.

The average balance of interest-earning assets increased $37.3 million, or 0.3%, to $13.384 billion for the quarter ended June 30, 2023 from $13.347 billion for the quarter ended June 30, 2022, primarily driven by a $907.8 million increase in the average balance of loans receivable, offset partially by an $807.2 million decrease in other interest-earning deposits.

These changes are described further below.

Interest income on loans receivable increased by $37.2 million, or 38.9%, to $132.7 million for the quarter ended June 30, 2023 compared to $95.6 million for the quarter ended June 30, 2022.

This increase in interest income was the result of increases in both the average yield on loans receivable and the average balance of loans receivable.

The average yield on loans receivable increased to 4.61% for the quarter ended March 31, 2023 from 3.61% for the quarter ended March 31, 2022, due to the increase in market interest rates.

Additionally, the average balance of loans receivable increased $988.3 million, or 10.0%, to $10.887 billion for the quarter ended March 31, 2023 from $9.899 billion for the quarter ended March 31, 2022, due to organic loan growth in our retail portfolio.

The average yield on loans receivable increased to 4.81% for the quarter ended June 30, 2023 from 3.77% for the quarter ended June 30, 2022, due to the increase in market interest rates.

Additionally, the average balance of loans receivable increased $907.8 million, or 8.9%, to $11.066 billion for the quarter ended June 30, 2023 from $10.158 billion for the quarter ended June 30, 2022, due to organic loan growth in our residential mortgage, consumer, and commercial portfolios.

Additionally contributing to loan growth were purchases of loan pools during 2022, including $182.8 million in small business equipment finance loans and $188.3 million of one- to four-family jumbo mortgage loans

Interest income on mortgage-backed securities increased by $2.2 million, or 34.2%, to $8.5 million for the quarter ended March 31, 2023 compared to $6.4 million for the quarter ended March 31, 2022.

This increase was driven by an increase in the average yield on mortgage-backed securities to 1.79% for the quarter ended March 31, 2023 from 1.31% for the quarter ended March 31, 2022 due to the purchase of higher yielding mortgage-backed securities in the prior year.

This increase in the average yield was offset slightly by a $35.5 million, or 1.8%, decrease in the average balance of mortgage-backed securities to $1.910 billion for the quarter ended March 31, 2023 from $1.945 billion for the quarter ended March 31, 2022 due to regular payments and maturities.

Interest income on investment securities increased by $194,000, or 14.4%, to $1.5 million for the quarter ended March 31, 2023 from $1.4 million for the quarter ended March 31, 2022.

This increase was attributable to increases in both the average yield and average balance of investment securities.

The average yield on investment securities increased to 1.61% for the quarter ended

March 31, 2023 from 1.45% for the quarter ended March 31, 2022.

In addition, the average balance increased by $11.0 million, or 2.9%, to $384.7 million for the quarter ended March 31, 2023 from $373.7 million for the quarter ended March 31, 2022.

Dividends on FHLB stock increased by $609,000, or 751.9%, to $690,000 for the quarter ended March 31, 2023 from $81,000 for the quarter ended March 31, 2022.

This increase was due to the increase in the average balance of FHLB stock of $25.8 million, or 185.7%, to $39.6 million for the quarter ended March 31, 2023 from $13.9 million for the quarter ended March 31, 2022.

Interest income on mortgage-backed securities increased by $1.2 million, or 16.3%, to $8.3 million for the quarter ended June 30, 2023 compared to $7.2 million for the quarter ended June 30, 2022.

This increase was driven by an increase in the average yield on mortgage-backed securities to 1.79% for the quarter ended June 30, 2023 from 1.47% for the quarter ended June 30, 2022 due to the purchase of higher yielding mortgage-backed securities in the prior year.

This increase in the average yield was offset by a $92.9 million, or 4.8%, decrease in the average balance of mortgage-backed securities to $1.859 billion for the quarter ended June 30, 2023 from $1.952 billion for the quarter ended June 30, 2022 due to the sale of available-for-sale investment securities during the quarter along with scheduled payments and maturities.

Interest income on investment securities increased by $110,000, or 7.9%, to $1.5 million for the quarter ended June 30, 2023 from $1.4 million for the quarter ended June 30, 2022.

This increase was attributable to an increase in the average yield on investment securities which increased to 1.61% for the quarter ended June 30, 2023 from 1.48% for the quarter ended June 30, 2022.

This increase in the average yield was offset slightly by a decrease in the average balance of investment securities by $2.4 million, or 0.6%, to $374.6 million for the quarter ended June 30, 2023 from $376.9 million for the quarter ended June 30, 2022.

Dividends on FHLB stock increased by $762,000, or 929.3%, to $844,000 for the quarter ended June 30, 2023 from $82,000 for the quarter ended June 30, 2022.

This increase was due to increases in both the average balance and the average yield on FHLB stock.

The average balance of FHLB stock increased by $32.1 million, or 238.9%, to $45.5 million for the quarter ended June 30, 2023 from $13.4 million for the quarter ended June 30, 2022.

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

In addition, the average yield increased to 7.06% for the quarter ended March 31, 2023 from 2.38% for the quarter ended March 31, 2022 due to increases in market interest rates.

Interest income on interest-earning deposits decreased by $44,000, or 9.4%, to $423,000 for the quarter ended March 31, 2023 from $467,000 for the quarter ended March 31, 2022.

The average balance of interest-earning deposits decreased by $1.188 billion, or 97.5%, to $30.8 million for the quarter ended March 31, 2023 from $1.219 billion for the quarter ended March 31, 2022 as the Bank redeployed these funds into higher yielding loans and investments.

Offsetting this decrease in average balance was an increase in the average yield on interest-earning deposits to 5.50% for the quarter ended March 31, 2023 from 0.15% for the quarter ended March 31, 2022, due to the aggressive campaign by the Federal Reserve Board over the last year to raise targeted short-term interest rates to combat inflation.

In addition, the average yield increased to 7.44% for the quarter ended June 30, 2023 from 2.44% for the quarter ended June 30, 2022 due to increases in market interest rates.

Interest income on interest-earning deposits decreased by $1.1 million, or 64.7%, to $594,000 for the quarter ended June 30, 2023 from $1.7 million for the quarter ended June 30, 2022.

The average balance of interest-earning deposits decreased by $807.2 million, or 95.4%, to $38.9 million for the quarter ended June 30, 2023 from $846.1 million for the quarter ended June 30, 2022 as the Bank redeployed these funds into higher yielding loans and investments.

Offsetting this decrease in average balance was an increase in the average yield on interest-earning deposits to 6.12% for the quarter ended June 30, 2023 from 0.79% for the quarter ended June 30, 2022, due to the aggressive campaign by the Federal Reserve Board over the last year to raise targeted short-term interest rates to combat inflation.

Interest Expense

Interest expense increased by $16.7 million, or 286.9%, to $22.5 million for the quarter ended March 31, 2023 from $5.8 million for the quarter ended March 31, 2022 due to the increase in the average cost of interest-bearing liabilities to 0.96% for the quarter ended March 31, 2023 from 0.25% for the quarter ended March 31, 2022.

This increase in cost of funds was primarily attributable to increases in the interest rates paid on borrowed funds and deposit accounts in response to increases in market interest rates as well as a change in mix to higher funding cost products.

Partially offsetting this increase was a decrease in the average balance of interest-bearing liabilities of $61.1 million, or 0.64%, to $9.497 billion for the quarter ended March 31, 2023 from $9.559 billion for the quarter ended March 31, 2022.

This decrease in average balance was driven by a decrease in average deposits by $656.6 million, or 7.2%, as we believe customers used funds during a period of higher inflationary costs and searched for higher alternative yields.

The decrease in the average deposit balance was funded by an increase in average borrowed funds by $604.9 million.

Interest expense increased by $29.8 million, or 529.5%, to $35.4 million for the quarter ended June 30, 2023 from $5.6 million for the quarter ended June 30, 2022 due to the increase in the average cost of interest-bearing liabilities to 1.47% for the quarter ended June 30, 2023 from 0.24% for the quarter ended June 30, 2022.

This increase in cost of funds was primarily attributable to increases in the interest rates paid on deposit accounts and borrowed funds in response to increases in market interest rates, as well as a change in mix to higher funding cost products.

In addition, the average balance of interest-bearing liabilities increased $214.5 million, or 2.27%, to $9.680 billion for the quarter ended June 30, 2023 from $9.466 billion for the quarter ended June 30, 2022 while the average balance of noninterest-bearing demand deposits decreased by $269.4 million, or 8.7%, to $2.821 billion at June 30, 2023 from $3.090 billion at June 30, 2022.

The increase in average balance of interest-bearing liabilities was driven by an increase in average borrowed funds of $713.6 million, or 576.7%, which were utlized to fund loan growth and offset a decrease in the average balance of interest-bearing deposits which declined by $493.8 million, or 5.4%, as we believe customers used funds during a period of higher inflationary costs and searched for higher alternative yields.

Net Interest Income

Net interest income increased by $21.8 million, or 24.1%, to $112.5 million for the quarter ended March 31, 2023 from $90.6 million for the quarter ended March 31, 2022.

Net interest income increased by $8.3 million, or 8.3%, to $108.5 million for the quarter ended June 30, 2023 from $100.3 million for the quarter ended June 30, 2022.

This increase is attributable to the factors discussed above.

Our interest rate spread increased to 3.17% for the quarter ended March 31, 2023 from 2.66% for the quarter ended March 31, 2022 and our net interest margin increased to 3.44% for the quarter ended March 31, 2023 from 2.73% for the quarter ended March 31, 2022 due to the change in market rates as well as the change in our interest-earning asset mix.

Our interest rate spread decreased to 2.85% for the quarter ended June 30, 2023 from 2.94% for the quarter ended June 30, 2022 due to the increase in our cost of interest bearing liabilities, and our net interest margin increased to 3.25% for the quarter ended June 30, 2023 from 3.05% for the quarter ended June 30, 2022 due to the change in market rates as well as the change in our interest-earning asset mix.

Provision for Credit Losses

The provision for credit losses increased by $4.9 million to $5.0 million for the quarter ended March 31, 2023 compared to $115,000 for the quarter ended March 31, 2022.

The current period provision for credit losses includes $4.9 million for credit losses - loans and $126,000 for credit losses - unfunded commitments.

The prior period provision for credit losses included a credit of $1.5 million for credit losses - loans and $1.6 million for credit losses - unfunded commitments.

The provision for credit losses increased by $2.9 million, or 48.2%, to $8.9 million for the quarter ended June 30, 2023 compared to $6.0 million for the quarter ended June 30, 2022.

The current period provision for credit losses includes $6.0 million for credit losses - loans and $2.9 million for credit losses - unfunded commitments.

The prior period provision for credit losses included $2.6 million for credit losses - loans and $3.4 million for credit losses - unfunded commitments.

T he $3.4 million increase in the provision for credit losses - loans was driven by continued growth within our loan portfolio, as well as forecasted economic deterioration reflected in our allowance for credit loss models.

This was partially offset by a $1.5 million decrease in our provision for credit losses - unfunded commitments compared to the same quarter last year based on the timing of the origination of loans with current off-balance sheet exposure.

As noted above, the Company continued to experience improvement in asset quality as total classified loans decreased by $111.3 million, or 34.8%, to $208.6 million at March 31, 2023 from $319.9 million at March 31, 2022 resulting primarily from upgrades and payoffs within our commercial real estate portfolio .

This was partially offset by a $476,000 decrease in our provision for credit losses - unfunded commitments compared to the same quarter last year based on the timing of the origination of loans with current off-balance sheet exposure.

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

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

” The provision that is recorded is sufficient, in our judgment, to bring this reserve to a level that reflects the current expected lifetime losses in our loan portfolio relative to loan mix, a reasonable and supportable economic forecast period and historical loss experience at March 31, 2023.

Noninterest Income

Noninterest income decreased by $1.8 million, or 6.9%, to $24.0 million for the quarter ended March 31, 2023 from $25.7 million for the quarter ended March 31, 2022.

This decrease was primarily due to a decrease in mortgage banking income of $941,000, or 64.2%, to $524,000 for the quarter ended March 31, 2023 from $1.5 million for the quarter ended March 31, 2022 due to the volatile interest rate environment causing less favorable pricing in the secondary market, as well as a decrease in mortgage volumes primarily due to higher market interest rates.

In addition, income from bank-owned life insurance decreased $714,000, or 36.0%, to $1.3 million for the quarter ended March 31, 2023 from $2.0 million for the quarter ended March 31, 2022 due to death benefits received in the prior year.

Noninterest income decreased by $651,000, or 2.1%, to $29.8 million for the quarter ended June 30, 2023 from $30.4 million for the quarter ended June 30, 2022.

This decrease was primarily due to a decrease in mortgage banking income of $1.1 million, or 52.3%, to $1.0 million for the quarter ended June 30, 2023 from $2.2 million for the quarter ended June 30, 2022 due to the volatile interest rate environment causing less favorable pricing in the secondary market, as well as a decrease in mortgage volumes primarily due to higher market interest rates.

In addition, income from bank-owned life insurance decreased $704,000, or 35.1%, to $1.3 million for the quarter ended June 30, 2023 from $2.0 million for the quarter ended June 30, 2022 due to death benefits received in the prior year.

Partially offsetting this decrease was an increase in service charges and fees of $1.2 million, or 8.5%, to $14.8 million for the quarter ended June 30, 2023 from $13.7 million for the quarter ended June 30, 2022 driven by loan fees resulting from one commercial relationship and an increase in deposit related fees based on customer activity in the current quarter.

In addition, during the current quarter we sold the mortgage servicing rights on approximately $1.3 billion of one- to four family mortgage loans for an $8.3 million gain, which enabled us to sell approximately $110.0 million of investment securities for an equivalent loss, resulting in no impact to tangible capital.

However, we were able to reallocate these funds from investments yielding approximately 2.0% into commercial loans yielding over 7.0%.

Noninterest Expense

Noninterest expense increased by $7.1 million, or 8.8%, to $87.5 million for the quarter ended March 31, 2023 from $80.3 million for the quarter ended March 31, 2022.

This increase was attributable to increases in professional services, processing expenses, acquisition expense, and federal deposit insurance premiums.

Professional service s increased $2.2 million, or 84.9%, to $4.8 million for the quarter ended March 31, 2023 from $2.6 million for the quarter ended March 31, 2022 due to the use of third-party consulting and staffing support.

Processing expenses increased $1.8 million, or 14.4%, to $14.4 million for the quarter ended March 31, 2023 from $12.5 million for the quarter ended March 31, 2022 due to the implementation of additional third party software programs.

Merger, asset disposition, and restructuring expense increased $1.4 million, or 103.9%, to $2.8 million for the quarter ended March 31, 2023 from $1.4 million for the quarter ended March 31, 2022 due to the severance and fixed asset charges related to the branch optimization and personnel reduction announced during the fourth quarter of 2022.

Lastly, FDIC insurance premiums increased $1.1 million, or 96.9%, to $2.2 million for the quarter ended March 31, 2023 from $1.1 million for the quarter ended March 31, 2022 due to an increase in the deposit insurance assessment rate beginning in the first quarter of 2023.

The provision for income taxes increased by $2.7 million, or 35.4%, to $10.3 million for the quarter ended March 31, 2023 from $7.6 million for the quarter ended March 31, 2022.

Noninterest expense increased by $4.4 million, or 5.5%, to $85.9 million for the quarter ended June 30, 2023 from $81.4 million for the quarter ended June 30, 2022.

This increase was primarily attributable to increases in processing expenses, restructuring expense, and federal deposit insurance premiums.

Processing expenses increased $1.7 million, or 13.1%, to $14.6 million for the quarter ended June 30, 2023 from $12.9 million for the quarter ended June 30, 2022 due to the implementation of additional third-party software programs.

Also contributing to this increase was a restructuring expense of $1.6 million during the quarter ended June 30, 2023 due to the severance charge for personnel changes.

Lastly, FDIC insurance premiums increased $934,000, or 82.7%, to $2.1 million for the quarter ended June 30, 2023 from $1.1 million for the quarter ended June 30, 2022 due to an increase in the deposit insurance assessment rate beginning in the first quarter of 2023.

The provision for income taxes increased by $663,000, or 6.7%, to $10.5 million for the quarter ended June 30, 2023 from $9.9 million for the quarter ended June 30, 2022.

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 22.5% and 24.5% for the year ending December 31, 2023.

Comparison of Operating Results for the Six Months Ended June 30, 2023 and 2022

Net income for the six months ended June 30, 2023 was $66.7 million, or $0.52 per diluted share, an increase of $5.0 million, or 8.1%, from $61.7 million, or $0.49 per diluted share, for the six months ended June 30, 2022.

The increase in net income resulted from an increase in net interest income of $30.1 million, or 15.8%, partially offset by an increase of $11.5 million, or 7.1%, in noninterest expense, an increase in provision for credit losses of $7.8 million, or 126.8%, an increase in income tax expense of $3.4 million, or 19.2%, and a decrease in noninterest income of $2.4 million, or 4.3%.

Net income for the six months ended June 30, 2023 represents annualized returns on average equity and average assets of 8.91% and 0.95%, respectively, compared to 8.01% and 0.87% for the six months ended June 30, 2022.

A further discussion of notable changes follows.

Interest Income

Total interest income increased by $76.6 million, or 37.9%, to $278.9 million for the six months ended June 30, 2023 from $202.3 million for the six months ended June 30, 2022.

This increase is the result of an increase in the average yield earned on interest-earning assets to 4.22% for the six months ended June 30, 2023 from 3.05% for the six months ended June 30, 2022.

This increase in average yield is attributed to the increased interest rate environment.

Partially offsetting this increase was a decrease in the average balance of interest-earning assets of $52.6 million, or 0.4%, to $13.318 billion for the six months ended June 30, 2023 from $13.371 billion for the six months ended June 30, 2022 driven by a decrease in the average balance of other interest-earning deposits, offset by an increase in the average balance of loans receivable, described further below.

Interest income on loans receivable increased by $72.7 million, or 39.6%, to $256.5 million for the six months ended June 30, 2023 from $183.7 million for the six months ended June 30, 2022.

This increase is attributed to an increase in the average yield on loans receivable to 4.71% for the six months ended June 30, 2023 from 3.69% for the six months ended June 30, 2022 due to the increase in market interest rates.

Additionally, the average balance of loans receivable increased $947.4 million, or 9.4%, to $10.977 billion for the six months ended June 30, 2023 from $10.030 billion for the six months ended June 30, 2022 due to organic loan growth in our residential mortgage, consumer, and commercial portfolios.

Additionally contributing to loan growth were purchases of loan pools during 2022 of small business equipment finance loans and one- to four-family jumbo mortgage loans.

Interest income on mortgage-backed securities increased by $3.3 million, or 24.7%, to $16.9 million for the six months ended June 30, 2023 from $13.5 million for the six months ended June 30, 2022.

This increase is attributed to an increase in the average yiel d on mortgage-backed securities to 1.79% for the six months ended June 30, 2023 from 1.39% for the six months ended June 30, 2022 due to the purchase of higher yielding mortgage-backed securities in the prior year.

Partially offsetting this increase was a decrease in the average balance of mortgage-backed securities of $64.4 million, or 3.3%, to $1.884 billion for the six months ended June 30, 2023 from $1.949 billion for the six months ended June 30, 2022 due to the sale of available-for-sale investment securities during the year coupled with r egularly scheduled payments and maturities.

Interest income on investment securities increased by $304,000, or 11.1%, to $3.1 million for the six months ended June 30, 2023 from $2.7 million for the six months ended June 30, 2022.

This increase is attributable to increases in both the average yield and the average balance of investment securities.

The average yield on investment securities increased to 1.61% for the six months ended June 30, 2023 from 1.46% for the six months ended June 30, 2022, and the average balance increased $4.3 million, or 1.1%, to $379.6 million for the six months ended June 30, 2023 from $375.3 million for the six months ended June 30, 2022.

Dividends on FHLB stock increased by $1.4 million, or 841.1%, to $1.5 million for the six months ended June 30, 2023 from $163,000 for the six months ended June 30, 2022.

This increase was due to increases in both the average yield and the average balance of FHLB stock.

The average balance of FHLB stock increased $28.9 million, or 212.0%, to $42.6 million for the six months ended June 30, 2023 from $13.6 million for the six months ended June 30, 2022.

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

Additionally, the average yield increased to 7.26% for the six months ended June 30, 2023 from 2.41% for the six months ended June 30, 2022 due to increases in market interest rates.

Interest income on interest-earning deposits decreased by $1.1 million, or 52.7%, to $1.0 million for the six months ended June 30, 2023 from $2.2 million for the six months ended June 30, 2022.

This decrease is attributable to a decrease in the average balance of interest-earning deposits by $968.8 million, or 96.5%, to $34.8 million for the six months ended June 30, 2023 from $1.004 billion for the six months ended June 30, 2022 as the Bank redeployed these funds into higher yielding loans and investments.

Partially offsetting this decrease in average balance was an increase in the average yield on interest-earning deposits to 5.88% for the six months ended June 30, 2023 from 0.43% for the six months ended June 30, 2022, due to the aggressive campaign by the Federal Reserve Board over the last year to raise targeted short-term interest rates to combat inflation.

Interest Expense

Interest expense increased by $46.5 million, or 406.3%, to $57.9 million for the six months ended June 30, 2023 from $11.4 million for the six months ended June 30, 2022.

This increase in interest expense was due to increases in the average cost of interest-bearing liabilities and the average balance of interest-bearing liabilities as well as the change in liability mix.

The average cost of interest-bearing liabilities increased to 1.22% for the six months ended June 30, 2023 from 0.24% for the six months ended June 30, 2022 resulting primarily from the rising rate environment.

The average balance of interest-bearing liabilities increased by $77.5 million, or 0.8%, to $9.589 billion for the six months ended June 30, 2023 from $9.512 billion for the six months ended June 30, 2022 driven by an increase in average borrowed funds by $659.6 million, or 509.4%.

Wholesale borrowings were utilized to fund loan growth as well as replace the decrease in the average balance of interest-bearing deposits which declined by $574.7 million, or 6.3%.

In addition, noninterest-bearing demand deposits decreased by $220.4 million, or 7.2%, as we believe customers used funds during a period of higher inflationary costs and searched for higher alternative yields.

Net Interest Income

Net interest income increased by $30.1 million, or 15.8%, to $221.0 million for the six months ended June 30, 2023 from $190.9 million for the six months ended June 30, 2022.

This increase is attributable to the factors discussed above.

Our interest rate spread increased to 3.01% for the six months ended June 30, 2023 from 2.81% for the six months ended June 30, 2022 and our net interest margin increased to 3.35% for the six months ended June 30, 2023 from 2.86% for the six months ended June 30, 2022 due to the change in market rates as well as the change in our interest-earning asset mix.

Provision for Credit Losses

The provision for credit losses increased by $7.8 million, or 126.8%, to $13.9 million for the six months ended June 30, 2023 from $6.1 million for the six months ended June 30, 2022.

The current period provision for credit losses includes $10.9 million for credit losses - loans and $3.0 million for credit losses - unfunded commitments.

The prior period provision for credit losses includes $1.1 million for credit losses - loans and $5.0 million for credit losses - unfunded commitments.

The $9.7 million increase in the provision for credit losses - loans was driven by continued growth within our loan portfolio, as well as forecasted economic deterioration reflected in our allowance for credit loss models.

This was partially offset by a $1.9 million decrease in our provision for credit losses - unfunded commitments compared to the same period last year based on the timing of the origination of loans with current off-balance sheet exposure.

Annualized net charge-offs to average loans decreased to 0.09% for the six months ended June 30, 2023 from 0.10% for the six months ended June 30, 2022.

Additionally, classified assets declined by $63.3 million, or 22.8%, to $214.1 million, or 1.90% of loans outstanding at June 30, 2023 from $277.4 million, or 2.66% of loans outstanding at June 30, 2022 resulting primarily from upgrades and payoffs within our commercial real estate portfolio.

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, 2023.

Noninterest Income

Noninterest income decreased by $2.4 million, or 4.3%, to $53.8 million for the six months ended June 30, 2023 from $56.2 million for the six months ended June 30, 2022.

This decrease was primarily due to a decrease in mortgage banking income of $2.1 million, or 57.2%, due to the volatile interest rate environment causing less favorable pricing in the secondary market, as well as a decrease in mortgage volumes primarily due to higher market interest rates.

In addition, income from bank-owned life insurance decreased $1.4 million, or 35.5%, to $2.6 million for the six months ended June 30, 2023 from $4.0 million for the six months ended June 30, 2022 due to death benefits received in the prior year.

Trust and other financial services income decreased by $1.2 million, or 8.0%, to $13.3 million for the six months ended June 30, 2023 from $14.5 million for the six months ended June 30, 2022 as a result of decreases in our trust advisory services.

Partially offsetting these decreases were increases in service charges and fees and the gain on the sale of SBA loans.

Service charges and fees increased by $1.3 million, or 4.8%, to $28.0 million for the six months ended June 30, 2023 from $26.7 million for the six months ended June 30, 2022 driven primarily by commercial loan fees and an increase in deposit related fees based on customer activity in the current year.

We also recognized a $1.1 million gain on the sale of SBA loans during the six months ended June 30, 2023 due to this newly launched lending vertical.

Lastly, as described in our quarterly results above, we recognized an $8.3 million gain on the sale of the servicing rights for a $1.3 billion 1-4 family mortgage portfolio.

We tried to maximize our profit in the current interest rate environment as we pivot towards a commercial bank, and it also enabled us to accelerate the cash flow from our investment portfolio by selling approximately $110.0 million of investment securities yielding just 2.0% for an equivalent $8.3 million loss and reinvesting these proceeds into commercial loans yielding over 7.0%.

Noninterest Expense

Noninterest expense increased by $11.5 million, or 7.1%, to $173.3 million for the six months ended June 30, 2023, from $161.8 million for the six months ended June 30, 2022.

This increase was due to increases in processing expenses, restructuring expense, professional services, federal deposit insurance premiums, and marketing expenses.

Processing expenses increased by $3.5 million, or 13.7%, to $29.0 million for the six months ended June 30, 2023, from $25.5 million for the six months ended June 30, 2022 due to the implementation of third party software programs.

Merger, asset disposition and restructuring expense increased $3.0 million, or 219.9%, to $4.4 million for the six months ended June 30, 2023, from $1.4 million for the six months ended June 30, 2022 due to the severance and fixed asset charges related to the branch optimization and personnel reduction previously announced.

Additionally, professional service expense increased by $2.7 million, or 45.0%, to $8.6 million for the six months ended June 30, 2023, from $5.9 million for the six months ended June 30, 2022 due to the use of third-party consulting and staffing support.

FDIC insurance premiums increased $2.0 million, or 89.8%, to $4.3 million for the six months ended June 30, 2023, from $2.3 million for the six months ended June 30, 2022 due to an increase in the deposit insurance assessment rate beginning in the first quarter of 2023.

Lastly, marketing expenses increased by $1.6 million, or 37.7%, to $5.7 million for the six months ended June 30, 2023, from $4.2 million for the six months ended June 30, 2022 due primarily to deposit marketing campaigns.

The provision for income taxes increased by $3.4 million, or 19.2%, to $20.8 million for the six months ended June 30, 2023 from $17.5 million for the six months ended June 30, 2022.

This increase was primarily due to the increase in income before tax of $8.4 million, or 10.6%.

We anticipate our effective tax rate to be between 22.5% and 24.5% for the year ending December 31, 2023.

Average Balance Sheet

3 unchanged sentences

Average balances are calculated using daily averages.

Quarter ended March 31,

Quarter ended June 30,

balance Interest Avg.

55 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, 2023 vs.

For the quarter ended June 30, 2023 vs.

Increase/(decrease) due to Total

17 unchanged sentences

Net change in net interest income $ 20,696 (12,203) 8,493

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 (i) Average

balance Interest Avg.

Interest-earning assets:

Residential mortgage loans $ 3,489,545 64,494 3.70 % $ 3,077,155 52,868 3.44 %

Home equity loans 1,278,831 33,033 5.21 % 1,285,668 23,433 3.68 %

Consumer loans 2,133,794 43,457 4.11 % 1,840,110 30,684 3.36 %

Commercial real estate loans 2,830,316 75,463 5.38 % 2,957,744 61,601 4.14 %

Commercial loans 1,244,404 41,225 6.68 % 868,854 15,987 3.66 %

Loans receivable (a) (b) (d) (includes FTE adjustments of $1,203 and $825, respectively) 10,976,890 257,672 4.73 % 10,029,531 184,573 3.71 %

Mortgage-backed securities (c) 1,884,412 16,863 1.79 % 1,948,794 13,518 1.39 %

Investment securities (c) (d) (includes FTE adjustments of $425 and $381, respectively) 379,611 3,478 1.83 % 375,323 3,130 1.67 %

FHLB stock, at cost 42,584 1,534 7.26 % 13,648 163 2.41 %

Other interest-earning deposits 34,842 1,017 5.88 % 1,003,627 2,151 0.43 %

Total interest-earning assets (includes FTE adjustments of $1,628 and $1,206, respectively) 13,318,339 280,564 4.25 % 13,370,923 203,535 3.07 %

Noninterest-earning assets (e) 865,711 969,111

Total assets $ 14,184,050 $ 14,340,034

Liabilities and shareholders’ equity

Interest-bearing liabilities:

Savings deposits $ 2,187,355 2,082 0.19 % $ 2,348,282 1,181 0.10 %

Interest-bearing demand deposits 2,540,879 2,599 0.21 % 2,866,333 631 0.04 %

Money market deposit accounts 2,314,631 10,516 0.92 % 2,660,745 1,321 0.10 %

Time deposits 1,514,289 17,858 2.38 % 1,256,513 3,959 0.64 %

Borrowed funds (f) 789,057 18,139 4.64 % 129,487 324 0.50 %

Subordinated debentures (g) 113,914 2,296 4.03 % 121,574 2,454 4.04 %

Junior subordinated debentures 129,368 4,433 6.82 % 129,109 1,571 2.42 %

Total interest-bearing liabilities 9,589,493 57,923 1.22 % 9,512,043 11,441 0.24 %

Noninterest-bearing demand deposits (h) 2,855,260 3,075,617

Noninterest-bearing liabilities 229,831 198,854

Total liabilities 12,674,584 12,786,514

Shareholders’ equity 1,509,466 1,553,520

Total liabilities and shareholders’ equity $ 14,184,050 $ 14,340,034

Net interest income/Interest rate spread 222,641 3.03 % 192,094 2.83 %

Net interest-earning assets/Net interest margin $ 3,728,846 3.37 % $ 3,858,880 2.87 %

Ratio of interest-earning assets to interest-bearing liabilities 1.39X 1.41X

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

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

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

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

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

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

(h) Average cost of deposits were 0.58% and 0.12%, respectively and average cost of Interest-bearing deposits were 0.78% and0.16%, respectively.

(i) Annualized.

Shown on a FTE basis.

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

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

GAAP basis yields were:

loans — 4.71% and 3.69%, respectively;

investment securities — 1.61% and 1.46%, respectively;

interest-earning assets — 4.22% and 3.05%, respectively.

GAAP basis net interest rate spreads were 3.01% and 2.81%, respectively;

and GAAP basis net interest margins were 3.35% and 2.86%, 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, 2023 vs.

Increase/(decrease) due to Total

increase/(decrease)

Interest-earning assets:

Loans receivable $ 50,859 22,240 73,099

Mortgage-backed securities 3,921 (576) 3,345

Investment securities 309 39 348

FHLB stock, at cost 320 1,051 1,371

Other interest-earning deposits 27,131 (28,265) (1,134)

Total interest-earning assets 82,540 (5,511) 77,029

Interest-bearing liabilities:

Savings deposits 1,054 (153) 901

Interest-bearing demand deposits 2,301 (333) 1,968

Money market deposit accounts 10,768 (1,573) 9,195

Time deposits 10,858 3,041 13,899

Borrowed funds 2,653 15,162 17,815

Subordinated debt (3) (155) (158)

Junior subordinated debentures 2,852 10 2,862

Total interest-bearing liabilities 30,483 15,999 46,482

Net change in net interest income $ 52,057 (21,510) 30,547

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