What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-03 compared with 2023-08-04 · 150 added, 144 removed, 351 unchanged (46% of the section changed)

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• possible impairments of securities held by us, including those issued by government entities and government sponsored enterprises;

• changes in the value of our goodwill or other intangible assets;

• the impact of the economy on our loan portfolio (including cash flow and collateral values), investment portfolio, customers and capital market activities;

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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.

Total assets at September 30, 2023 were $14.362 billion, an increase of $248.9 million, or 1.8%, from $14.113 billion at December 31, 2022.

This increase in assets was primarily driven by an increase in loans receivable, partially offset by a decrease in 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.

Total marketable securities decreased by $259.2 million, or 12.3%, to $1.840 billion at September 30, 2023 from $2.099 billion at December 31, 2022.

Available-for-sale securities decreased $208.0 million, and held-to-maturity securities decreased $51.1 million.

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

Gross loans receivable increased by $389.8 million, or 3.6%, to $11.310 billion at September 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.

Our commercial loan portfolio increased by $368.6 million, or 32.6%, to $1.501 billion at September 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 $99.5 million, or 3.5%, to $2.923 billion at September 30, 2023, from $2.824 billion at December 31, 2022.

These increases in our total business banking loans were slightly offset by a decrease in our personal banking loans of $78.3 million, or 1.1%, to $6.887 billion at September 30, 2023 compared to $6.965 billion at December 31, 2022.

This included a $38.9 million, or 3.0%, decrease in our home equity portfolio and a $25.8 million, or 0.7%, decrease in our mortgage portfolio as demand for these products has been impacted by the higher market interest rates.

Total deposits increased by $325.3 million, or 2.8%, to $11.790 billion at September 30, 2023 from $11.465 billion at December 31, 2022.

This increase was driven by a $1.206 billion, or 114.6%, increase in time deposits due to customer preferences for this fixed maturity product.

Partially offsetting this increase were decreases in savings and money market deposits totaling $573.4 million, or 12.1%, due to customers choosing higher yielding product alternatives.

In addition, demand deposit accounts decreased by $307.3 million, or 5.4%, as we believe customers used funds during this period of higher inflationary costs.

Total shareholders’ equity at September 30, 2023 was $1.498 billion, or $11.79 per share, an increase of $6.9 million, or 0.5%, from $1.491 billion, or $11.74 per share, at December 31, 2022.

This increase was the result of year-to-date earnings of $105.9 million, partially offset by $76.2 million of cash dividend payments for the nine months ended September 30, 2023 as well as a change in accumulated other comprehensive loss of $26.4 million, or 15.4%, primarily due to an increase in unrealized loss on our available-for-sale investment portfolio as a result of higher market interest rates.

Regulatory Capital

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Quantitative measures, established by regulation to ensure capital adequacy, require financial institutions to maintain minimum amounts and ratios (set forth in the table below) of Total, CET1 and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined).

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

At June 30, 2023

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

At September 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 June 30, 2023 was 9.91%.

Northwest Bank’s liquidity ratio at September 30, 2023 was 9.66%.

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.

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.

At September 30, 2023, Northwest had $3.119 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 $119.0 million at September 30, 2023, as well as $302.4 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 September 30, 2023 and 2022.

The common stock dividend payout ratio (dividends declared per share divided by net income per diluted share) for September 30, 2023 and 2022 was 64.5% and 69.0% on dividends of $0.20 per share.

On October 18, 2023, the Board of Directors declared a cash dividend of $0.20 per share payable on November 14, 2023 to shareholders of record as of November 2, 2023.

This represents the 116 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.

June 30, 2023 December 31, 2022

September 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 June 30, 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 September 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.

The ACL increased by $6.8 million, or 5.8%, to $124.8 million, or 1.10% of total loans at September 30, 2023 from $118.0 million, or 1.08% of total loans, at December 31, 2022.

This increase was primarily 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 $27.6 million, or 11.7%, to $208.6 million at September 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.

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.

Nonaccrual loans of $76.7 million, or 0.68% of total loans receivable at September 30, 2023, decreased by $4.6 million, or 5.6%, from $81.2 million, or 0.74% of total loans receivable at December 31, 2022.

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

As a percentage of average loans, annualized net charge-offs increased to 0.13% for the quarter ended September 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 September 30, 2023 and 2022

Net income for the quarter ended September 30, 2023 was $39.2 million, or $0.31 per diluted share, an increase of $1.9 million, or 5.1%, from net income of $37.3 million, or $0.29 per diluted share, for the quarter ended September 30, 2022.

The increase in net income resulted primarily from a decrease in provision for credit losses and an increase in noninterest income.

The provision for credit losses decreased $10.3 million, or 91.1%, and noninterest income increased $4.1 million, or 15.2%.

These changes were partially offset by an increase in noninterest expense of $8.6 million, or 10.9% and a decrease in net interest income of $4.4 million, or 3.9%.

Net income for the quarter ended September 30, 2023 represents annualized returns on average equity and average assets of 10.27% and 1.08%, respectively, compared to 9.84% and 1.05% 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.

Total interest income increased by $33.0 million, or 27.8%, to $151.6 million for the quarter ended September 30, 2023 from $118.6 million for the quarter ended September 30, 2022.

This increase is attributable to increases in both the average yield and average balance of interest-earning assets.

The average yield earned on interest-earning assets increased to 4.49% for the quarter ended September 30, 2023 from 3.58% for the quarter ended September 30, 2022 due to the continued rising interest rate environment.

The average balance of interest-earning assets increased $249.0 million, or 1.9%, to $13.405 billion for the quarter ended September 30, 2023 from $13.156 billion for the quarter ended September 30, 2022, primarily driven by a $710.4 million increase in the average balance of loans receivable, offset partially by a $238.7 million decrease in the average balance of mortgage-backed securities and a $193.8 million decrease in the average balance of 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.

Interest income on loans receivable increased by $33.7 million, or 31.5%, to $140.7 million for the quarter ended September 30, 2023 compared to $106.9 million for the quarter ended September 30, 2022.

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

The average yield on loans receivable increased to 4.99% for the quarter ended September 30, 2023 from 4.05% for the quarter ended September 30, 2022, due to the increase in market interest rates as well as a change in mix to higher yielding loan products.

The average balance of loans receivable increased $710.4 million, or 6.8%, to $11.191 billion for the quarter ended September 30, 2023 from $10.481 billion for the quarter ended September 30, 2022, due to organic loan growth in our commercial, residential mortgage, consumer, and commercial real estate 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.

Interest income on mortgage-backed securities decreased by $611,000, or 7.0%, to $8.1 million for the quarter ended September 30, 2023 compared to $8.7 million for the quarter ended September 30, 2022.

This decrease was driven by a $238.7 million, or 11.8%, decrease in the average balance of mortgage-backed securities to $1.781 billion for the quarter ended September 30, 2023 from $2.020 billion for the quarter ended September 30, 2022 due to the sale of lower yielding available-for-sale securities during the current year along with scheduled payments and maturities.

Slightly offsetting this decrease was an increase in the average yield on mortgage-backed securities to 1.81% for the quarter ended September 30, 2023 from 1.72% for the quarter ended September 30, 2022 due to the purchase of higher yielding mortgage-backed securities in the prior year.

Interest income on investment securities decreased by $270,000, or 17.5%, to $1.3 million for the quarter ended September 30, 2023 from $1.5 million for the quarter ended September 30, 2022.

This decrease was attributable to decreases in both the average yield and the average balance of investment securities.

The average yield decreased to 1.52% for the quarter ended September 30, 2023 from 1.59% for the quarter ended September 30, 2022, and the average balance of investment securities decreased by $52.6 million, or 13.5%, to $336.1 million for the quarter ended September 30, 2023 from $388.8 million for the quarter ended September 30, 2022 as cash flows have been redirected to the higher yield loan portfolio.

Dividends on FHLB stock increased by $520,000, or 351.4%, to $668,000 for the quarter ended September 30, 2023 from $148,000 for the quarter ended September 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.

The average balance of FHLB stock increased by $23.7 million, or 168.9%, to $37.7 million for the quarter ended September 30, 2023 from $14.0 million for the quarter ended September 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.

In addition, the average yield increased to 7.03% for the quarter ended September 30, 2023 from 4.19% for the quarter ended September 30, 2022 due to increases in market interest rates.

Interest income on interest-earning deposits decreased by $381,000, or 29.4%, to $914,000 for the quarter ended September 30, 2023 from $1.3 million for the quarter ended September 30, 2022, driven by a decrease in the average balance of interest-earning deposits of $193.8 million, or 76.5%, to $59.4 million for the quarter ended September 30, 2023 from $253.2 million for the quarter ended September 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 6.11% for the quarter ended September 30, 2023 from 2.00% for the quarter ended September 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 $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.

Interest expense increased by $37.4 million, or 636.8%, to $43.2 million for the quarter ended September 30, 2023 from $5.9 million for the quarter ended September 30, 2022 due to increases in both the average balance and average cost of interest-bearing liabilities.

The average balance of interest-bearing liabilities increased $603.5 million, or 6.53%, to $9.850 billion for the quarter ended September 30, 2023 from $9.246 billion for the quarter ended September 30, 2022 while the average balance of noninterest-bearing demand deposits decreased by $336.4 million, or 10.9%, to $2.757 billion at September 30, 2023 from $3.093 billion at September 30, 2022.

We believe customers utilized funds in their demand deposit accounts for both higher yielding products as well as higher inflationary cost of goods.

The increase in average balance of interest-bearing liabilities was driven by an increase in average borrowed funds of $516.4 million, or 406.4%, which were used to fund loan growth.

Additionally, the average balance of interest-bearing deposits increased by $86.4 million, or 1.0%, specifically driven by an increase in time deposits due to customer preferences for this fixed maturity product type.

The average cost of interest-bearing liabilities increased to 1.74% for the quarter ended September 30, 2023 from 0.25% for the quarter ended September 30, 2022, 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 cost products.

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.

Net interest income decreased by $4.4 million, or 3.9%, to $108.4 million for the quarter ended September 30, 2023 from $112.7 million for the quarter ended September 30, 2022.

This decrease is attributable to the factors discussed above.

Our interest rate spread decreased to 2.75% for the quarter ended September 30, 2023 from 3.33% for the quarter ended September 30, 2022 and our net interest margin decreased to 3.21% for the quarter ended September 30, 2023 from 3.40% for the quarter ended September 30, 2022 due to the increase in our cost of interest bearing liabilities.

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 provision for credit losses decreased by $10.3 million, or 91.1%, to $1.0 million for the quarter ended September 30, 2023 compared to $11.3 million for the quarter ended September 30, 2022.

The current period provision for credit losses includes $4.0 million for credit losses - loans and a provision release of $3.0 million for credit losses - unfunded commitments.

The prior period provision for credit losses included $7.7 million for credit losses - loans and $3.6 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.

T he $3.7 million decrease in the provision for credit losses - loans can be attributed to changes in the economic forecasts reflected in our allowance for credit loss models, as well continued decreases in classified loans.

While economic forecasts have continued to deteriorate in the current year, our current allowance reflects such that deterioration was slower during the current period as compared to the same period last year.

Classified assets decreased by $29.1 million, or 12.2%, to $208.6 million, or 1.84% of total loans, at September 30, 2023 from $237.7 million, or 2.21% of total loans, at September 30, 2022.

The $6.6 million decrease in our provision for credit losses - unfunded commitments was related to 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%.

Noninterest income increased by $4.1 million, or 15.2%, to $30.9 million for the quarter ended September 30, 2023 from $26.8 million for the quarter ended September 30, 2022.

This increase was driven by a $3.1 million, or 209.2%, increase in income from bank-owned life insurance to $4.6 million for the quarter ended September 30, 2023 from $1.5 million for the quarter ended September 30, 2022 due to death benefits received in the current period.

In addition, service charges and fees increased $947,000, or 6.6%, to $15.3 million for the quarter ended September 30, 2023 from $14.3 million for the quarter ended September 30, 2022 driven by deposit related fees based on customer activity in the current quarter.

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.

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.

Noninterest expense increased by $8.6 million, or 10.9%, to $87.6 million for the quarter ended September 30, 2023 from $79.0 million for the quarter ended September 30, 2022.

This increase was primarily attributable to increases in compensation and employee benefits, other expenses, processing expenses, and FDIC insurance premiums.

Compensation and employee benefits expense increased $4.5 million, or 9.7%, to $51.2 million for the quarter ended September 30, 2023, from $46.7 million for the quarter ended September 30, 2022 primarily as a result of additional talent and expertise to propel the organization to higher performance levels, in particular commercial and small business lending as well as risk management and back office support and infrastructure.

Other expenses increased $1.7 million to $2.0 million for the quarter ended September 30, 2023, from $321,000 for the quarter ended September 30, 2022 due to an increase in employee relocation and other expenses.

Processing expenses increased $1.3 million, or 9.4%, to $14.7 million for the quarter ended September 30, 2023, from $13.4 million for the quarter ended September 30, 2022 due to the implementation of additional third-party software programs.

Lastly, FDIC insurance premiums increased $1.1 million, or 95.1%, to $2.3 million for the quarter ended September 30, 2023 from $1.2 million for the quarter ended September 30, 2022 due to an increase in the deposit insurance assessment rate beginning in the first quarter of 2023.

The provision for income taxes decreased by $522,000, or 4.4%, to $11.5 million for the quarter ended September 30, 2023 from $12.0 million for the quarter ended September 30, 2022.

This decrease in income taxes was due primarily to a decrease in our effective tax rate in the current year related to bank-owned life insurance tax benefits.

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.

Comparison of Operating Results for the Nine Months Ended September 30, 2023 and 2022

Net income for the nine months ended September 30, 2023 was $105.9 million, or $0.83 per diluted share, an increase of $6.9 million, or 7.0%, from $99.0 million, or $0.78 per diluted share, for the nine months ended September 30, 2022.

The increase in net income resulted from an increase in net interest income of $25.7 million, or 8.5%, a decrease in provision for credit losses of $2.5 million, or 14.3%, and an increase in noninterest income of $1.7 million, or 2.0%.

These changes were partially offset by an increase of $20.1 million, or 8.4%, in noninterest expense and an increase in income tax expense of $2.8 million, or 9.6%.

Net income for the nine months ended September 30, 2023 represents annualized returns on average equity and average assets of 9.37% and 0.99%, respectively, compared to 8.61% and 0.93% for the nine months ended September 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.

Total interest income increased by $109.6 million, or 34.1%, to $430.5 million for the nine months ended September 30, 2023 from $320.9 million for the nine months ended September 30, 2022.

This increase is the result of increases in both the average yield and average balance of interest-earning assets.

The average yield on interest-earning assets increased to 4.31% for the nine months ended September 30, 2023 from 3.23% for the nine months ended September 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.

The average balance of interest-earning assets increased $67.7 million, or 0.5%, to $13.369 billion for the nine months ended September 30, 2023 from $13.301 billion for the nine months ended September 30, 2022 driven by an increase in the average balance of loans receivable, offset by a decrease in the average balance of other interest-earning deposits, described further below.

Interest income on loans receivable increased by $106.4 million, or 36.6%, to $397.1 million for the nine months ended September 30, 2023 from $290.7 million for the nine months ended September 30, 2022.

This increase is attributed to increases in both the average yield and the average balance of loans receivable.

The average yield on loans receivable increased to 4.81% for the nine months ended September 30, 2023 from 3.82% for the nine months ended September 30, 2022 due to the increase in market interest rates.

The average balance of loans receivable increased $867.5 million, or 8.5%, to $11.049 billion for the nine months ended September 30, 2023 from $10.182 billion for the nine months ended September 30, 2022 due to organic loan growth in our commercial, residential mortgage, and consumer 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.

Interest income on mortgage-backed securities increased by $2.7 million, or 12.3%, to $24.9 million for the nine months ended September 30, 2023 from $22.2 million for the nine months ended September 30, 2022.

This increase is attributed to an increase in the average yiel d on mortgage-backed securities to 1.80% for the nine months ended September 30, 2023 from 1.50% for the nine months ended September 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 $123.1 million, or 6.2%, to $1.850 billion for the nine months ended September 30, 2023 from $1.973 billion for the nine months ended September 30, 2022 due to the sale of available-for-sale securities during the year coupled with r egularly scheduled payments and maturities.

Interest income on investment securities remained relatively flat, increasing by $34,000, or 0.8%, to $4.3 million for the nine months ended September 30, 2023.

This increase is attributable to an increase in the average yield on investment securities.

The average yield on investment securities increased to 1.58% for the nine months ended September 30, 2023 from 1.51% for the nine months ended September 30, 2022.

Slightly offsetting this increase in average yield was a decrease in the average balance of investment securities by $14.9 million, or 3.9%, to $365.0 million for the nine months ended September 30, 2023 from $379.9 million for the nine months ended September 30, 2022.

Dividends on FHLB stock increased by $1.9 million, or 608.0%, to $2.2 million for the nine months ended September 30, 2023 from $311,000 for the nine months ended September 30, 2022.

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

The average balance of FHLB stock increased $27.2 million, or 197.2%, to $40.9 million for the nine months ended September 30, 2023 from $13.8 million for the nine months ended September 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.

Additionally, the average yield increased to 7.19% for the nine months ended September 30, 2023 from 3.02% for the nine months ended September 30, 2022, due to increases in market interest rates.

Interest income on interest-earning deposits decreased by $1.5 million, or 44.0%, to $1.9 million for the nine months ended September 30, 2023 from $3.4 million for the nine months ended September 30, 2022.

This decrease is attributable to a decrease in the average balance of interest-earning deposits by $688.9 million, or 91.4%, to $64.6 million for the nine months ended September 30, 2023 from $753.5 million for the nine months ended September 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 4.00% for the nine months ended September 30, 2023 from 0.60% for the nine months ended September 30, 2022, due to the 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.

Interest expense increased by $83.8 million, or 484.4%, to $101.2 million for the nine months ended September 30, 2023 from $17.3 million for the nine months ended September 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%.

The average cost of interest-bearing liabilities increased to 1.40% for the nine months ended September 30, 2023 from 0.25% for the nine months ended September 30, 2022 resulting primarily from the rising interest rate environment.

The average balance of interest-bearing liabilities increased by $252.0 million, or 2.7%, to $9.677 billion for the nine months ended September 30, 2023 from $9.425 billion for the nine months ended September 30, 2022 driven by an increase in average borrowed funds by $608.6 million, or 463.3%.

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 $351.9 million, or 3.9%.

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.

In addition, noninterest-bearing demand deposits decreased by $259.5 million, or 8.4%, as we believe customers used funds during a period of higher inflationary costs and searched for higher yield alternatives.

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.

Net interest income increased by $25.7 million, or 8.5%, to $329.4 million for the nine months ended September 30, 2023 from $303.6 million for the nine months ended September 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.

Our interest rate spread decreased to 2.91% for the nine months ended September 30, 2023 from 2.98% for the nine months ended September 30, 2022 and our net interest margin increased to 3.29% for the nine months ended September 30, 2023 from 3.05% for the nine months ended September 30, 2022 due to the change in market rates as well as the change in our interest-earning asset and funding 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 provision for credit losses decreased by $2.5 million, or 14.3%, to $14.9 million for the nine months ended September 30, 2023 from $17.4 million for the nine months ended September 30, 2022.

The current period provision for credit losses includes $14.9 million for credit losses - loans and $65,000 for credit losses - unfunded commitments.

The prior period provision for credit losses includes $8.8 million for credit losses - loans and $8.6 million for credit losses - unfunded commitments.

The $6.0 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.

This was partially offset by an $8.5 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 increased to 0.10% for the nine months ended September 30, 2023 from 0.02% for the nine months ended September 30, 2022 due to several large recoveries during 2022.

Additionally, classified assets declined by $29.1 million, or 12.2%, to $208.6 million, or 1.84% of loans outstanding at September 30, 2023 from $237.7 million, or 2.21% of loans outstanding at September 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 income increased by $1.7 million, or 2.0%, to $84.7 million for the nine months ended September 30, 2023 from $83.0 million for the nine months ended September 30, 2022.

This increase was primarily due to increases in service charges and fees, income from bank-owned life insurance, and a gain on the sale of Small Business Administration (SBA) loans.

Service charges and fees increased by $2.2 million, or 5.4%, to $43.3 million for the nine months ended September 30, 2023 from $41.1 million for the nine months ended September 30, 2022 driven primarily by commercial loan fees and an increase in deposit related fees based on customer activity in the current year.

In addition, income from bank-owned life insurance increased $1.7 million, or 30.5%, to $7.1 million for the nine months ended September 30, 2023 from $5.5 million for the nine months ended September 30, 2022 due to death benefits recognized in the current period.

We also recognized a $1.4 million gain on the sale of SBA loans during the nine months ended September 30, 2023 due to this newly launched lending vertical.

Partially offsetting these increases to income was a decrease in mortgage banking income of $2.2 million, or 50.2%, to $2.2 million for the nine months ended September 30, 2023 from $4.4 million for the nine months ended September 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, during the nine months ended September 30, 2023, we recognized an $8.3 million gain on the sale of the servicing rights for a $1.3 billion one- to four- 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 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.

Noninterest expense increased by $20.1 million, or 8.4%, to $260.9 million for the nine months ended September 30, 2023, from $240.7 million for the nine months ended September 30, 2022.

This increase was due to increases in almost all expense categories due to both inflationary costs as well as the continued build out of talent and infrastructure necessary to propel the organization to a higher level of performance.

In particular, processing expenses increased by $4.8 million, or 12.2%, to $43.7 million for the nine months ended September 30, 2023, from $38.9 million for the nine months ended September 30, 2022 due to the implementation of third party software programs.

Compensation and employee benefits increased by $3.8 million, or 2.7%, to $145.5 million for the nine months ended September 30, 2023 from $141.7 million for the nine months ended September 30, 2022 driven by increases in commercial lending, small business lending, risk management and internal audit salaries and benefits over the past twelve months.

FDIC insurance premiums increased $3.2 million, or 91.6%, to $6.6 million for the nine months ended September 30, 2023, from $3.5 million for the nine months ended September 30, 2022 due to an increase in the deposit insurance assessment rate beginning in the first quarter of 2023.

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

Other expenses increased by $2.4 million, or 83.3%, to $5.4 million for the nine months ended September 30, 2023, from $2.9 million for the nine months ended September 30, 2022 due to an increase in employee relocation and other expenses.

Additionally, professional service expense increased by $2.3 million, or 24.8%, to $11.6 million for the nine months ended September 30, 2023, from $9.3 million for the nine months ended September 30, 2022 due to the use of third-party consulting and staffing support.

Lastly, marketing expenses increased by $1.8 million, or 28.6%, to $8.1 million for the nine months ended September 30, 2023, from $6.3 million for the nine months ended September 30, 2022 due primarily to deposit marketing campaigns.

The provision for income taxes increased by $2.8 million, or 9.6%, to $32.3 million for the nine months ended September 30, 2023 from $29.5 million for the nine months ended September 30, 2022.

This increase was primarily due to the increase in income before tax of $9.8 million, or 7.6%.

5 unchanged sentences

Average balances are calculated using daily averages.

Quarter ended June 30,

Quarter ended September 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 June 30, 2023 vs.

For the quarter ended September 30, 2023 vs.

Increase/(decrease) due to Total

22 unchanged sentences

Average balances are calculated using daily averages.

Six months ended June 30,

Nine months ended September 30,

balance Interest Avg.

17 unchanged sentences

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 %

Savings deposits (h) $ 2,163,564 4,777 0.30 % $ 2,348,944 1,758 0.10 %

Interest-bearing demand deposits (h) 2,550,433 6,684 0.35 % 2,842,071 1,008 0.05 %

Money market deposit accounts (h) 2,246,422 17,289 1.03 % 2,647,301 2,067 0.10 %

Time deposits (h) 1,733,428 35,993 2.78 % 1,207,444 5,416 0.60 %

Borrowed funds (f) 740,011 26,077 4.71 % 131,368 563 0.57 %

33 unchanged sentences

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.

For the nine months ended September 30, 2023 vs.

Increase/(decrease) due to Total

18 unchanged sentences

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