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;
• 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 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;
• changes in liquidity, including the size and composition of our deposit portfolio, and the percentage of uninsured deposits in the portfolio;
• the ability of third-party providers to perform their obligations to us;
• 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;
• 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 or the inability of the federal government to manage debt limits;
• 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;
• 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; and
• our compensation expense associated with equity allocated or awarded 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 2022 Annual Report on Form 10-K.
Comparison of Financial Condition
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 $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 $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 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
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).
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At June 30, 2023
Actual Minimum capital requirements (1) Well capitalized requirements
Amount Ratio Amount Ratio Amount Ratio
Total capital (to risk weighted assets)
Northwest Bancshares, Inc. $ 1,776,017 16.233 % $ 1,148,771 10.500 % $ 1,094,067 10.000 %
Northwest Bank 1,512,791 13.839 % 1,147,796 10.500 % 1,093,139 10.000 %
Tier 1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,532,058 14.003 % 929,957 8.500 % 875,254 8.000 %
Northwest Bank 1,382,847 12.650 % 929,168 8.500 % 874,511 8.000 %
CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,406,604 12.857 % 765,847 7.000 % 711,144 6.500 %
Northwest Bank 1,382,847 12.650 % 765,197 7.000 % 710,540 6.500 %
Tier 1 capital (leverage) (to average assets)
Northwest Bancshares, Inc. 1,532,058 10.744 % 570,363 4.000 % 712,954 5.000 %
Northwest Bank 1,382,847 9.700 % 570,275 4.000 % 712,843 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).
At December 31, 2022
Actual Minimum capital requirements (1) Well capitalized requirements
Amount Ratio Amount Ratio Amount Ratio
Total capital (to risk weighted assets)
Northwest Bancshares, Inc. $ 1,745,701 16.363 % $ 1,120,216 10.500 % $ 1,066,872 10.000 %
Northwest Bank 1,568,202 14.712 % 1,119,214 10.500 % 1,065,918 10.000 %
Tier I capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,516,621 14.216 % 906,841 8.500 % 853,498 8.000 %
Northwest Bank 1,452,962 13.631 % 906,030 8.500 % 852,734 8.000 %
CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,391,296 13.041 % 746,810 7.000 % 693,467 6.500 %
Northwest Bank 1,452,962 13.631 % 746,143 7.000 % 692,847 6.500 %
Tier I capital (leverage) (to average assets)
Northwest Bancshares, Inc. 1,516,621 10.817 % 560,816 4.000 % 701,020 5.000 %
Northwest Bank 1,452,962 10.365 % 560,706 4.000 % 700,882 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 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 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 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.
Dividends
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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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.
June 30, 2023 December 31, 2022
(in thousands)
Loans 90 days or more past due:
Residential mortgage loans $ 6,290 5,574
Home equity loans 1,965 2,257
Vehicle loans 1,890 2,471
Other consumer loans 557 608
Commercial real estate loans 8,501 7,589
Commercial real estate - owner occupied 74 278
Commercial loans 2,414 1,829
Total loans 90 days or more past due $ 21,691 20,606
Total real estate owned (REO) $ 371 413
Total loans 90 days or more past due and REO 22,062 21,019
Total loans 90 days or more past due to net loans receivable 0.19 % 0.19 %
Total loans 90 days or more past due and REO to total assets 0.15 % 0.15 %
Nonperforming assets:
Nonaccrual loans - loans 90 days or more past due $ 21,159 19,861
Nonaccrual loans - loans less than 90 days past due 57,430 61,375
Loans 90 days or more past due still accruing 532 744
Total nonperforming loans 79,121 81,980
Total nonperforming assets $ 79,492 82,393
Total nonaccrual loans to total loans 0.70 % 0.74 %
Allowance for Credit Losses
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, 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
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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 Losses 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 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 $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 0.70% 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 0.10% 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.
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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 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 4.32% 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 4.81% 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 $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 7.44% 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.
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Interest Expense
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 $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 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 $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 $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 June 30, 2023.
Noninterest Income
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%.
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Noninterest Expense
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.
Income Taxes
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.
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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.
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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.
Income Taxes
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.
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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 June 30,
2023 2022
Average
balance Interest Avg.
yield/
cost (h) Average
balance Interest Avg.
yield/
cost (h)
Assets
Interest-earning assets:
Residential mortgage loans $ 3,485,517 32,485 3.73 % $ 3,171,469 27,327 3.45 %
Home equity loans 1,273,298 16,898 5.32 % 1,277,440 11,961 3.76 %
Consumer loans 2,143,804 22,662 4.24 % 1,880,769 15,777 3.36 %
Commercial real estate loans 2,836,443 38,426 5.43 % 2,915,750 31,844 4.32 %
Commercial loans 1,326,598 22,872 6.92 % 912,454 9,090 3.94 %
Loans receivable (a) (b) (d) (includes FTE adjustments of $619 and $425, respectively) 11,065,660 133,343 4.83 % 10,157,882 95,999 3.79 %
Mortgage-backed securities (c) 1,859,427 8,326 1.79 % 1,952,375 7,158 1.47 %
Investment securities (c) (d) (includes FTE adjustments of $207 and $192, respectively) 374,560 1,715 1.83 % 376,935 1,590 1.69 %
FHLB stock, at cost 45,505 844 7.44 % 13,428 82 2.44 %
Other interest-earning deposits 38,912 594 6.12 % 846,142 1,684 0.79 %
Total interest-earning assets (includes FTE adjustments of $826 and $617, respectively) 13,384,064 144,822 4.34 % 13,346,762 106,513 3.20 %
Noninterest-earning assets (e) 861,853 909,943
Total assets $ 14,245,917 $ 14,256,705
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Savings deposits (g) $ 2,142,941 1,393 0.26 % $ 2,361,919 589 0.10 %
Interest-bearing demand deposits (g) 2,469,666 1,648 0.27 % 2,857,336 310 0.04 %
Money market deposit accounts (g) 2,221,713 6,113 1.10 % 2,653,467 668 0.10 %
Time deposits (g) 1,765,454 12,663 2.88 % 1,220,815 1,774 0.58 %
Borrowed funds (f) 837,358 10,202 4.89 % 123,749 167 0.54 %
Subordinated debentures 113,958 1,148 4.03 % 119,563 1,203 4.03 %
Junior subordinated debentures 129,401 2,280 6.97 % 129,142 920 2.82 %
Total interest-bearing liabilities 9,680,491 35,447 1.47 % 9,465,991 5,631 0.24 %
Noninterest-bearing demand deposits (g) 2,820,928 3,090,372
Noninterest-bearing liabilities 224,508 193,510
Total liabilities 12,725,927 12,749,873
Shareholders’ equity 1,519,990 1,506,832
Total liabilities and shareholders’ equity $ 14,245,917 $ 14,256,705
Net interest income/Interest rate spread 109,375 2.87 % 100,882 2.96 %
Net interest-earning assets/Net interest margin $ 3,703,573 3.28 % $ 3,880,771 3.07 %
Ratio of interest-earning assets to interest- bearing liabilities 1.38X 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.
(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 deposits were 0.77% and 0.11%, respectively, average cost of interest-bearing deposits were 1.02% 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 — 4.81% and 3.77%, respectively; investment securities — 1.61% and 1.48%, respectively; interest-earning assets — 4.32% and 3.18%, respectively. GAAP basis net interest rate spreads were 2.85% and 2.94%, respectively; and GAAP basis net interest margins were 3.25% and 3.05%, 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 June 30, 2023 vs. 2022
Increase/(decrease) due to Total
increase/(decrease)
Rate Volume
Interest-earning assets:
Loans receivable $ 26,406 10,938 37,344
Mortgage-backed securities 1,584 (416) 1,168
Investment securities 136 (11) 125
FHLB stock, at cost 166 596 762
Other interest-earning deposits 11,261 (12,351) (1,090)
Total interest-earning assets 39,553 (1,244) 38,309
Interest-bearing liabilities:
Savings deposits 946 (142) 804
Interest-bearing demand deposits 1,597 (259) 1,338
Money market deposit accounts 6,634 (1,189) 5,445
Time deposits 6,982 3,907 10,889
Borrowed funds 1,341 8,694 10,035
Subordinated debt 1 (56) (55)
Junior subordinated debentures 1,356 4 1,360
Total interest-bearing liabilities 18,857 10,959 29,816
Net change in net interest income $ 20,696 (12,203) 8,493
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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.
Six months ended June 30,
2023 2022
Average
balance Interest Avg.
yield/
cost (i) Average
balance Interest Avg.
yield/
cost (i)
Assets
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.
(c) Average balances do not include the effect of unrealized gains or losses on securities held as available-for-sale.
(d) Interest income on tax-free investment securities and tax-free loans are presented on a fully taxable equivalent (“FTE”) basis.
(e) Average balances include the effect of unrealized gains or losses on securities held as available-for-sale.
(f) Average balances include FHLB borrowings and collateralized borrowings.
(g) On September 9, 2020, the Company issued $125.0 million of 4.00% fixed-to-floating rate subordinated notes with a maturity of September 15, 2030.
(h) Average cost of deposits were 0.58% 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.
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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 six months ended June 30, 2023 vs. 2020
Increase/(decrease) due to Total
increase/(decrease)
Rate Volume
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
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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.