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;
• 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;
• 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 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 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 $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
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 (dollars in thousands).
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At September 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. $ 1,789,604 16.114 % $ 1,166,094 10.500 % $ 1,110,566 10.000 %
Northwest Bank 1,514,889 13.652 % 1,165,115 10.500 % 1,109,634 10.000 %
Tier 1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,548,121 13.940 % 943,981 8.500 % 888,453 8.000 %
Northwest Bank 1,387,508 12.504 % 943,189 8.500 % 887,707 8.000 %
CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,422,601 12.810 % 777,396 7.000 % 721,868 6.500 %
Northwest Bank 1,387,508 12.504 % 776,744 7.000 % 721,262 6.500 %
Tier 1 capital (leverage) (to average assets)
Northwest Bancshares, Inc. 1,548,121 10.773 % 574,801 4.000 % 718,501 5.000 %
Northwest Bank 1,387,508 9.656 % 574,776 4.000 % 718,471 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 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 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.
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Dividends
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.
Nonperforming Assets
The following table sets forth information with respect to nonperforming assets. Nonaccrual loans are those loans on which the accrual of interest has ceased. Generally, when a loan is 90 days past due, we fully reverse all accrued interest thereon and cease to accrue interest thereafter. Exceptions are made for loans that have contractually matured, are in the process of being modified to extend the maturity date and are otherwise current as to principal and interest, and well-secured loans that are in the process of collection. Loans may also be placed on nonaccrual before they reach 90 days past due if conditions exist that call into question our ability to collect all contractual interest. Other nonperforming assets represent property acquired through foreclosure or repossession. Foreclosed property is carried at the lower of its fair value less estimated costs to sell or the principal balance of the related loan.
September 30, 2023 December 31, 2022
(in thousands)
Loans 90 days or more past due:
Residential mortgage loans $ 7,695 5,574
Home equity loans 2,206 2,257
Vehicle loans 2,274 2,471
Other consumer loans 746 608
Commercial real estate loans 8,042 7,589
Commercial real estate - owner occupied 374 278
Commercial loans 2,472 1,829
Total loans 90 days or more past due $ 23,809 20,606
Total real estate owned (REO) $ 363 413
Total loans 90 days or more past due and REO 24,172 21,019
Total loans 90 days or more past due to net loans receivable 0.21 % 0.19 %
Total loans 90 days or more past due and REO to total assets 0.17 % 0.15 %
Nonperforming assets:
Nonaccrual loans - loans 90 days or more past due 23,082 19,861
Nonaccrual loans - loans less than 90 days past due 53,572 61,375
Loans 90 days or more past due still accruing 728 744
Total nonperforming loans 77,382 81,980
Total nonperforming assets $ 77,745 82,393
Total nonaccrual loans to total loans 0.68 % 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.
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Credit relationships that have been classified as substandard or doubtful and are greater than or equal to $1.0 million are reviewed by the Credit Administration department to determine if they no longer continue to demonstrate similar risk characteristics to their loan pool. If a loan no longer demonstrates similar risk characteristics to their loan pool they are removed from the pool and an individual assessment will be performed.
If it is determined that a loan needs to be individually assessed, the Credit Administration department determines the proper measure of fair value for each loan based on one of three methods: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent, less costs of sale or disposal. If the measurement of the fair value of the loan is more or less than the amortized cost basis of the loan, the Credit Administration department adjusts the specific allowance associated with that individual loan accordingly.
If a substandard or doubtful loan is not individually assessed, it is grouped with other loans that possess common characteristics for credit losses and analysis. For the purpose of calculating reserves, we have grouped our loans into seven segments: residential mortgage loans, home equity loans, vehicle loans, consumer loans, commercial real estate loans, commercial real estate loans - owner occupied and commercial loans. The allowance for credit losses is measured using a combination of statistical models and qualitative assessments. We use a twenty four month forecasting period and revert to historical average loss rates thereafter. Reversion to average loss rates takes place over twelve months. Historical average loss rates are calculated using historical data beginning in October 2009 through the current period.
The credit losses for individually assessed loans along with the estimated loss for each homogeneous pool are consolidated into one summary document. This summary schedule along with the support documentation used to establish this schedule is presented to management’s Allowance for Credit 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 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 $6.8 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 $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.
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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 $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 $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 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 $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 7.03% for the quarter ended September 30, 2023 from 4.19% for the quarter ended September 30, 2022 due to increases in market interest rates.
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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 $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 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 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 $3.7 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 September 30, 2023.
Noninterest Income
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.
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Noninterest Expense
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.
Income Taxes
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 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 $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. 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 $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.
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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 7.19% 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 $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 1.40% 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 $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 $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 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 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 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.
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In determining the amount of the current period provision, we considered current economic conditions, including but not limited to unemployment levels, bankruptcy filings, and changes in real estate values and the impact of these factors on the quality of our loan portfolio and historical loss experience. We analyze the allowance for credit losses as described in the section entitled "Allowance for Credit Losses." The provision that is recorded is sufficient, in our judgment, to bring this reserve to a level that reflects the current expected lifetime losses in our loan portfolio relative to loan mix, a reasonable and supportable economic forecast period and historical loss experience at September 30, 2023.
Noninterest Income
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 $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.
Income Taxes
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%. 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 September 30,
2023 2022
Average
balance Interest Avg.
yield/
cost (h) Average
balance Interest Avg.
yield/
cost (h)
Assets
Interest-earning assets:
Residential mortgage loans $ 3,476,446 32,596 3.75 % $ 3,331,173 29,414 3.53 %
Home equity loans 1,264,134 17,435 5.47 % 1,274,918 13,658 4.25 %
Consumer loans 2,092,023 23,521 4.46 % 1,981,754 17,256 3.45 %
Commercial real estate loans 2,911,145 41,611 5.67 % 2,842,597 34,158 4.70 %
Commercial loans 1,447,211 26,239 7.19 % 1,050,124 12,978 4.84 %
Loans receivable (a) (b) (d) (includes FTE adjustments of $735 and $521, respectively) 11,190,959 141,402 5.01 % 10,480,566 107,464 4.07 %
Mortgage-backed securities (c) 1,781,010 8,072 1.81 % 2,019,715 8,683 1.72 %
Investment securities (c) (d) (includes FTE adjustments of $154 and $215, respectively) 336,125 1,431 1.70 % 388,755 1,762 1.81 %
FHLB stock, at cost 37,722 668 7.03 % 14,028 148 4.19 %
Other interest-earning deposits 59,433 915 6.11 % 253,192 1,295 2.00 %
Total interest-earning assets (includes FTE adjustments of $889 and $736, respectively) 13,405,249 152,488 4.51 % 13,156,256 119,352 3.60 %
Noninterest-earning assets (e) 974,074 896,663
Total assets $ 14,379,323 $ 14,052,919
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Savings deposits (g) $ 2,116,759 2,695 0.51 % $ 2,350,248 594 0.10 %
Interest-bearing demand deposits (g) 2,569,229 4,086 0.63 % 2,794,338 360 0.05 %
Money market deposit accounts (g) 2,112,228 6,772 1.27 % 2,620,850 692 0.10 %
Time deposits (g) 2,164,559 18,136 3.32 % 1,110,906 1,511 0.54 %
Borrowed funds (f) 643,518 7,937 4.89 % 127,073 239 0.75 %
Subordinated debentures 114,045 1,148 4.03 % 113,695 1,149 4.04 %
Junior subordinated debentures 129,466 2,456 7.42 % 129,207 1,322 4.00 %
Total interest-bearing liabilities 9,849,804 43,230 1.74 % 9,246,317 5,867 0.25 %
Noninterest-bearing demand deposits (g) 2,757,091 3,093,490
Noninterest-bearing liabilities 257,141 209,486
Total liabilities 12,864,036 12,549,293
Shareholders’ equity 1,515,287 1,503,626
Total liabilities and shareholders’ equity $ 14,379,323 $ 14,052,919
Net interest income/Interest rate spread 109,258 2.77 % 113,485 3.35 %
Net interest-earning assets/Net interest margin $ 3,555,445 3.23 % $ 3,909,939 3.42 %
Ratio of interest-earning assets to interest- bearing liabilities 1.36X 1.42X
(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 1.07% and 0.11%, respectively, average cost of interest-bearing deposits were 1.40% and 0.14%, 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 — 4.99% and 4.05%, respectively; investment securities — 1.52% and 1.59%, respectively; interest-earning assets — 4.49% and 3.58%, respectively. GAAP basis net interest rate spreads were 2.75% and 3.33%, respectively; and GAAP basis net interest margins were 3.21% and 3.40%, respectively.
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Rate/Volume Analysis
(in thousands)
The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) net change. Changes that cannot be attributed to either rate or volume have been allocated to both rate and volume.
For the quarter ended September 30, 2023 vs. 2022
Increase/(decrease) due to Total
increase/(decrease)
Rate Volume
Interest-earning assets:
Loans receivable $ 24,962 8,976 33,938
Mortgage-backed securities 470 (1,081) (611)
Investment securities (107) (224) (331)
FHLB stock, at cost 104 416 520
Other interest-earning deposits 2,578 (2,958) (380)
Total interest-earning assets 28,007 5,129 33,136
Interest-bearing liabilities:
Savings deposits 2,398 (297) 2,101
Interest-bearing demand deposits 4,084 (358) 3,726
Money market deposit accounts 7,711 (1,631) 6,080
Time deposits 7,797 8,828 16,625
Borrowed funds 1,328 6,370 7,698
Subordinated debt (4) 3 (1)
Junior subordinated debentures 1,129 5 1,134
Total interest-bearing liabilities 24,443 12,920 37,363
Net change in net interest income $ 3,564 (7,791) (4,227)
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Average Balance Sheet
(in thousands)
The following table sets forth certain information relating to the Company’s average balance sheet and reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are calculated using daily averages.
Nine months ended September 30,
2023 2022
Average
balance Interest Avg.
yield/
cost (i) Average
balance Interest Avg.
yield/
cost (i)
Assets
Interest-earning assets:
Residential mortgage loans $ 3,485,130 97,090 3.71 % $ 3,162,758 82,282 3.47 %
Home equity loans 1,273,878 50,467 5.30 % 1,282,045 37,443 3.90 %
Consumer loans 2,119,717 66,977 4.22 % 1,887,843 47,588 3.37 %
Commercial real estate loans 2,857,555 117,074 5.48 % 2,918,940 95,813 4.33 %
Commercial loans 1,312,750 67,465 6.87 % 929,942 28,981 4.11 %
Loans receivable (a) (b) (d) (includes FTE adjustments of $1,937 and $1,416, respectively) 11,049,030 399,073 4.83 % 10,181,528 292,107 3.84 %
Mortgage-backed securities (c) 1,849,567 24,935 1.80 % 1,972,694 22,201 1.50 %
Investment securities (c) (d) (includes FTE adjustments of $579 and $627, respectively) 364,956 4,909 1.79 % 379,850 4,923 1.73 %
FHLB stock, at cost 40,945 2,202 7.19 % 13,776 311 3.02 %
Other interest-earning deposits 64,560 1,931 4.00 % 753,482 3,447 0.60 %
Total interest-earning assets (includes FTE adjustments of $2,516 and $2,043, respectively) 13,369,058 433,050 4.33 % 13,301,330 322,989 3.25 %
Noninterest-earning assets (e) 880,799 941,947
Total assets $ 14,249,857 $ 14,243,277
Liabilities and shareholders’ equity
Interest-bearing liabilities:
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 %
Subordinated debentures (g) 113,958 3,444 4.03 % 118,919 3,603 4.04 %
Junior subordinated debentures 129,401 6,889 7.02 % 129,142 2,893 2.95 %
Total interest-bearing liabilities 9,677,217 101,153 1.40 % 9,425,189 17,308 0.25 %
Noninterest-bearing demand deposits (h) 2,822,178 3,081,640
Noninterest-bearing liabilities 239,034 199,742
Total liabilities 12,738,429 12,706,571
Shareholders’ equity 1,511,428 1,536,706
Total liabilities and shareholders’ equity $ 14,249,857 $ 14,243,277
Net interest income/Interest rate spread 331,897 2.93 % 305,681 3.00 %
Net interest-earning assets/Net interest margin $ 3,691,841 3.32 % $ 3,876,141 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) 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 0.75% and 0.11%, respectively and average cost of Interest-bearing deposits were 1.00% and0.15%, 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 — 4.81% and 3.82%, respectively; investment securities — 1.58% and 1.51%, respectively; interest-earning assets — 4.31% and 3.23%, respectively. GAAP basis net interest rate spreads were 2.91% and 2.98%, respectively; and GAAP basis net interest margins were 3.29% 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 nine months ended September 30, 2023 vs. 2022
Increase/(decrease) due to Total
increase/(decrease)
Rate Volume
Interest-earning assets:
Loans receivable $ 75,633 31,333 106,966
Mortgage-backed securities 4,394 (1,660) 2,734
Investment securities 186 (200) (14)
FHLB stock, at cost 426 1,465 1,891
Other interest-earning deposits 19,094 (20,610) (1,516)
Total interest-earning assets 99,733 10,328 110,061
Interest-bearing liabilities:
Savings deposits 3,428 (409) 3,019
Interest-bearing demand deposits 6,440 (764) 5,676
Money market deposit accounts 18,307 (3,085) 15,222
Time deposits 19,655 10,922 30,577
Borrowed funds 4,066 21,448 25,514
Subordinated debt (8) (151) (159)
Junior subordinated debentures 3,982 14 3,996
Total interest-bearing liabilities 55,870 27,975 83,845
Net change in net interest income $ 43,863 (17,647) 26,216
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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.