INDEPENDENT BANK CORPORATION Introduction. The following section presents additional information to assess the financial condition and results of operations ofIndependent Bank Corporation ("IBCP"), its wholly-owned bank,Independent Bank (the "Bank"), and their subsidiaries. This section should be read in conjunction with the Condensed Consolidated Financial Statements. We also encourage you to read our 2022 Annual Report on Form 10-K filed with theU.S. Securities and Exchange Commission ("SEC"). That report includes a list of risk factors that you should consider in connection with any decision to buy or sell our securities.
Overview. We provide banking services to customers located primarily in
Recent Developments. As explained in more detail below under Item 1A - "Risk Factors" - the recent closures ofSilicon Valley Bank and Signature Bank have impacted the financial services industry. These events have caused banks to reexamine their funding sources and liquidity risks and in some cases have caused deposit holders to reevaluate their banking relationships. As addressed below, we believe these events have caused little to no impact on our deposit base, aside from the mix and pricing of deposits, and that our liquidity and funding and capital resources remain strong. In the wake of these events, initiatives taken with our customer base included discussing how these events unfolded, reinforcing our current capital and liquidity positions and education to maximizeFDIC insurance coverage. (See "Deposits and borrowings" and "Liquidity and capital resources"). Pressures from heightened inflation, rising interest rates, elevated energy prices, supply chain disruptions, concerns over theRussia -Ukraine war, and foreign currency exchange rate fluctuations continue to create significant economic uncertainty. In an effort to combat inflationary pressures, theFederal Reserve Board increased the federal funds rate by a total of 4.25% over 2022, including a 75-basis point increase inNovember 2022 and a 50-basis point increase inDecember 2022 . The rate was increased by another 25-basis points inFebruary 2023 and another 25-basis points inMarch 2023 . There is a great deal of uncertainty regarding whether and the extent to which theFederal Reserve may continue to increase rates or even reduce rates in the coming months. In addition, the ongoingRussia -Ukraine war, its impact on energy prices, and related events are likely to continue to create additional pressure on economic activity. The resulting responses by theU.S. and other countries (including the imposition of economic sanctions and export restrictions), and the potential for wider conflict has increased volatility and uncertainty in global financial markets and could result in significant market disruptions, including in our customers' industries or sectors. The extent to which these pressures may impact our business, results of operations, asset valuations, financial condition, and customers will depend on future developments, which continue to be highly uncertain and difficult to predict. Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, securities available for sale ("AFS"), securities held to maturity ("HTM"), loans, capitalized mortgage loan servicing rights or deferred tax assets.
It is against this backdrop that we discuss our results of operations and financial condition for the first quarter of 2023 as compared to earlier periods.
RESULTS OF OPERATIONS
Summary. We recorded net income of $13.0 million and $18.0 million during the
three months ended March 31, 2023 and 2022, respectively. The decrease in 2023
first quarter results as compared to 2022 is primarily due to a decrease in
non-interest income and an increase in the provision for credit losses that were
partially offset by an increase in net-interest income and decreases in
non-interest expense and income tax expense.
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Key performance ratios
Three months ended March 31,
2023 2022
Net income (annualized) to
Average assets 1.06 % 1.54 %
Average shareholders' equity 14.77 % 19.38 %
Net income per common share
Basic $ 0.62 $ 0.85
Diluted 0.61 0.84
Net interest income. Net interest income is the most important source of our
earnings and thus is critical in evaluating our results of operations. Changes
in our net interest income are primarily influenced by our level of
interest-earning assets and the income or yield that we earn on those assets and
the manner and cost of funding our interest-earning assets. Certain
macro-economic factors can also influence our net interest income such as the
level and direction of interest rates, the difference between short-term and
long-term interest rates (the steepness of the yield curve) and the general
strength of the economies in which we are doing business. Finally, risk
management plays an important role in our level of net interest income. The
ineffective management of credit risk and interest-rate risk in particular can
adversely impact our net interest income.
Our net interest income totaled $38.4 million during the first quarter of 2023,
an increase of $5.4 million , or 16.5% from the year-ago period. This increase
primarily reflects a $204.0 million increase in average interest-earning assets
as well as a 33 basis point increase in our tax equivalent net interest income
as a percent of average interest-earning assets (the "net interest margin").
The increase in average interest-earning assets in 2023 as compared to 2022 primarily reflects growth in commercial, mortgage and installment loans funded from an increase in deposits.
The 33 basis point increase in our net interest margin is attributed to a 151 basis point increase in interest income as a percent of average interest-earning assets that was partially offset by an increase in the cost of funding liabilities. These increases are primarily attributed to the 475 basis point increase in the federal funds rate since March of 2022. Despite this year over year net interest margin expansion, our net interest margin has been negatively impacted by changes in funding mix (including movement of non-interest bearing deposits to interest-bearing deposits and an increase in time deposits) and higher deposit pricing betas. This change in funding mix and pricing is expected to continue to have an impact on our net interest margin during 2023. See Asset/liability management. Our net interest income is also impacted by our level of non-accrual loans. In the first quarter of 2023, non-accrual loans averaged$3.7 million . In the first quarter of 2022, non-accrual loans averaged$5.0 million . In the first quarter of 2023 we had net recoveries of$0.13 million of unpaid interest on loans placed on or taken off non-accrual or on loans previously charged-off compared to net recoveries of$0.14 million during the same period in 2022. 55
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Average Balances and Tax Equivalent Rates
Three Months Ended March 31,
2023 2022
Average Average
Balance Interest Rate (2) Balance Interest Rate (2)
(Dollars in thousands)
Assets
Taxable loans $ 3,487,539 $ 44,234 5.12 % $ 2,971,566 $ 28,340 3.85 %
Tax-exempt loans (1) 6,630 76 4.65 8,532 99 4.71
Taxable securities 822,572 5,884 2.86 1,080,252 4,552 1.69
Tax-exempt securities (1) 323,503 3,506 4.34 326,973 2,015 2.47
Interest bearing cash 38,889 464 4.84 87,317 37 0.17
Other investments 17,653 211 4.85 18,117 180 4.03
Interest Earning Assets 4,696,786 54,375 4.67 4,492,757 35,223 3.16
Cash and due from banks 60,442 58,676
Other assets, net 231,212 169,772
Total Assets $ 4,988,440 $ 4,721,205
Liabilities
Savings and interest-bearing
checking $ 2,535,045 8,857 1.42 $ 2,503,014 641 0.10
Time deposits 657,686 4,903 3.02 338,354 126 0.15
Other borrowings 112,137 1,735 6.27 108,969 973 3.62
Interest Bearing Liabilities 3,304,868 15,495 1.90 2,950,337 1,740 0.24
Non-interest bearing
deposits 1,224,375 1,317,160
Other liabilities 102,477 77,698
Shareholders' equity 356,720 376,010
Total liabilities and
shareholders' equity $ 4,988,440 $ 4,721,205
Net Interest Income $ 38,880 $ 33,483
Net Interest Income as a
Percent of Average Interest
Earning Assets 3.33 % 3.00 %
_________________________________
(1)Interest on tax-exempt loans and securities available for sale is presented on a fully tax equivalent basis assuming a marginal tax rate of 21%. (2)Annualized
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Reconciliation of Non-GAAP Financial Measures
Three Months Ended
March 31,
2023 2022
(Dollars in thousands)
Net Interest Margin, Fully Taxable Equivalent ("FTE")
Net interest income $ 38,441 $ 33,001
Add: taxable equivalent adjustment 439 482
Net interest income - taxable equivalent $ 38,880 $ 33,483
Net interest margin (GAAP) (1) 3.29 % 2.96 %
Net interest margin (FTE) (1) 3.33 % 3.00 %
(1)Annualized.
Provision for credit losses. The provision for credit losses on loans was a
credit of $0.8 million and $1.6 million in the first quarters of 2023 and 2022,
respectively. The provision on loans reflects our assessment of the allowance
for credit losses (the "ACL") on loans taking into consideration factors such as
loan growth, loan mix, levels of non-performing and classified loans, economic
conditions and loan net charge-offs. While we use relevant information to
recognize losses on loans, additional provisions for related losses may be
necessary based on changes in economic conditions, customer circumstances and
other credit risk factors. See "Portfolio Loans and asset quality" for a
discussion of the various components of the ACL on loans and their impact on the
provision for credit losses on loans in 2023. The decrease in the provision for
credit losses credit on loans from the prior year period is primarily due to the
change in the adjustment to allocations based on subjective factors as the prior
year included a reduction in allocations related to risks associated with
COVID-19.
The provision for credit losses on securities HTM was an expense of $2.99
million and zero in the first quarters of 2023 and 2022, respectively. The
provision in 2023 was the result of a loss incurred on a $3.0 million corporate
security (Signature Bank) that defaulted during the quarter. This security was
fully charged off during the first quarter of 2023.
Non-interest income. Non-interest income is a significant element in assessing
our results of operations. Non-interest income totaled $10.6 million during the
first quarter of 2023 compared to $18.9 million in the first quarter of 2022.
The components of non-interest income are as follows:
Non-Interest Income
Three Months Ended March 31,
2023 2022
(In thousands)
Interchange income $ 3,205 $ 3,082
Service charges on deposit accounts 2,857 2,957
Net gains on assets
Mortgage loans 1,256 835
Securities (222) 70
Mortgage loan servicing, net 726 9,641
Investment and insurance commissions 827 738
Bank owned life insurance 111 138
Other 1,791 1,487
Total non-interest income $ 10,551 $ 18,948 Interchange income increased on a comparative quarterly basis in 2023 as compared to 2022. The quarterly increase was due to higher rates earned on debit card transactions.
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Service charges on deposit accounts decreased modestly on a comparative quarterly basis in 2023 as compared to 2022. The quarterly decrease was principally due to increases in non-sufficient funds occurrences (and related fees) and an increase in treasury management fees.
As reflected in the table below, the sale of mortgage loans dropped significantly on a quarterly basis in 2023 compared to 2022. Mortgage loan activity is summarized as follows:
Mortgage Loan Activity
Three Months Ended
March 31,
2023 2022
(Dollars in thousands)
Mortgage loans originated $ 113,021 $ 270,194
Mortgage loans sold 106,846 221,725
Net gains on mortgage loans 1,256 835
Net gains as a percent of mortgage loans sold ("Loan Sales Margin")
1.18 % 0.38 %
Fair value adjustments included in the Loan Sales Margin 1.20 (1.87)
Mortgage loan refinance volumes declined in the first quarter of 2023 as
compared to 2022 as higher mortgage loan interest rates in 2023 reduced this
activity. Mortgage loans sold decreased in the first quarter of 2023 as compared
to 2022 due primarily to lower loan origination volume.
The volume of loans sold is dependent upon our ability to originate mortgage
loans as well as the demand for fixed-rate obligations and other loans that we
choose to not put into portfolio because of our established interest-rate risk
parameters. (See "Portfolio Loans and asset quality.") Net gains on mortgage
loans are also dependent upon economic and competitive factors as well as our
ability to effectively manage exposure to changes in interest rates and thus can
often be a volatile part of our overall revenues.
Net gains on mortgage loans totaled $1.3 million and $0.8 million during the
first quarters of 2023 and 2022, respectively. The increase from the prior year
quarter, despite a decrease in mortgage loans sold, was primarily due to the
impact of fair value adjustments on certain unhedged construction loans during
the first quarter of 2022 as a result of the significant increase in interest
rates during that quarter. During the the first quarter of 2023, interest rates
were less volatile and these constructions loans were fully hedged.
We recorded a net loss of $0.2 million and a net gain $0.1 million on securities
AFS for the first three months of 2023 and 2022, respectively. We recorded no
credit related charges in either 2023 or 2022 on securities AFS. See
"Securities" below and note #3 to the Condensed Consolidated Financial
Statements.
Mortgage loan servicing, net, generated income of $0.7 million and $9.6 million
in the first quarters of 2023 and 2022, respectively. The significant decrease
in mortgage loan servicing, net is due to changes in the fair value of
capitalized mortgage loan servicing rights associated with changes in interest
rates and the associated expected future prepayment levels and expected float
rates.
Mortgage loan servicing, net activity is summarized in the following table:
Mortgage Servicing Revenue
Three Months Ended March 31,
2023 2022
Mortgage loan servicing, net: (In thousands)
Revenue, net $ 2,222 $ 2,083
Fair value change due to price $
(635)
Fair value change due to pay-downs$ (861) $ (894) Total$ 726 $ 9,641 58
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Activity related to capitalized mortgage loan servicing rights is as follows:
Capitalized Mortgage Loan Servicing Rights
Three months ended March 31,
2023 2022
(In thousands)
Balance at beginning of period $ 42,489 $ 26,232
Originated servicing rights capitalized 930 2,143
Change in fair value (1,496) 7,558
Balance at end of period $ 41,923 $ 35,933
At March 31, 2023 we were servicing approximately $3.52 billion in mortgage
loans for others on which servicing rights have been capitalized. This servicing
portfolio had a weighted average coupon rate of 3.66% and a weighted average
service fee of approximately 25.6 basis points. Capitalized mortgage loan
servicing rights at March 31, 2023 totaled $41.9 million , representing
approximately 119.1 basis points on the related amount of mortgage loans
serviced for others.
Investment and insurance commissions represent revenues generated on the sale or
management of investments and insurance for our customers. These increased on a
quarterly basis in 2023 as compared to 2022, primarily due to growth in assets
under management and in annuity sales.
Other non-interest income increased on a comparative quarterly basis in 2023 as compared to 2022 due primarily to an increase in swap fee income.
Non-interest expense. Non-interest expense is an important component of our results of operations. We strive to efficiently manage our cost structure.
Non-interest expense decreased by
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The components of non-interest expense are as follows:
Non-Interest Expense
Three Months Ended
March 31,
2023 2022
(In thousands)
Compensation $ 13,269 $ 12,435
Performance-based compensation 2,245 3,662
Payroll taxes and employee benefits 3,825 4,033
Compensation and employee benefits 19,339 20,130
Data processing 2,991 2,216
Occupancy, net 2,159 2,543
Interchange expense 1,049 1,011
Furniture, fixtures and equipment 926 1,045
FDIC deposit insurance 783 522
Communications 668 757
Legal and professional 607 493
Loan and collection 578 559
Advertising 495 680
Amortization of intangible assets 137 232
Supplies 106 123
Correspondent bank service fees 63 77
Provision for loss reimbursement on sold loans 10 33
Net gains on other real estate and repossessed assets (46) (55)
Costs related to unfunded lending commitments (475) (355)
Other 1,567 1,439
Total non-interest expense $ 30,957 $ 31,450 Compensation and employee benefits expenses, in total, decreased
Compensation expense increased by
Performance-based compensation decreased by$1.4 million in the first quarter of 2023 compared to the same period in 2022. The decrease is primarily due to lower expected incentive compensation payout for salaried and hourly employees and a decrease in mortgage lending related incentives attributed to the decline in mortgage lending volume. Payroll taxes and employee benefits decreased by$0.2 million in the first quarter of 2023 compared to the same period in 2022, due primarily to decreases in payroll taxes (reflecting lower performance-based compensation costs), our 401(k) plan match and other indirect costs related to mortgage lending. Data processing expense increased by$0.8 million in the first quarter of 2023 compared to the same prior year period due primarily to the prior year including a credit from our core data processor related to certain expenses that had been previously paid and expensed, core data processor annual asset growth and CPI related cost increases and lower net mortgage processing relating cost deferrals due to lower mortgage loan volume. Income tax expense. We recorded an income tax expense of$2.9 million in the first quarter of 2023. This compares to an income tax expense of$4.1 million in the first quarter of 2022. The decrease in expense for the first three months of 2023 compared to the same period in 2022 is primarily due to a decrease in pretax income. 60
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Our actual income tax expense is different than the amount computed by applying our statutory income tax rate to our income before income tax primarily due to tax-exempt interest income, tax-exempt income from the increase in the cash surrender value on life insurance, and differences in the value of stock awards that vest and stock options that are exercised as compared to the initial fair values that were expensed. We assess whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a "more likely than not" standard. The ultimate realization of this asset is primarily based on generating future income. We concluded atMarch 31, 2023 and 2022 and atDecember 31, 2022 , that the realization of substantially all of our deferred tax assets continues to be more likely than not. FINANCIAL CONDITION
Summary. Our total assets increased by
Deposits totaled$4.54 billion atMarch 31, 2023 , an increase of$165.7 million fromDecember 31, 2022 . The increase in deposits fromDecember 31, 2022 , is due in part to the seasonal cash management needs of our business and municipal customers and our increased use of brokered deposits. Securities. We maintain diversified securities portfolios, which include obligations ofU.S. government-sponsored agencies, securities issued by states and political subdivisions, residential and commercial mortgage-backed securities, asset-backed securities, corporate securities, trust preferred securities and foreign government securities (that are denominated inU.S. dollars). We regularly evaluate asset/liability management needs and attempt to maintain a portfolio structure that provides sufficient liquidity and cash flow. We believe that the unrealized losses on securities AFS are temporary in nature and are expected to be recovered within a reasonable time period. Based upon our liquidity and capital resources (as explained in more detail below under "Liquidity and capital resources"), we believe that we have the ability to hold securities with unrealized losses to maturity or until such time as the unrealized losses reverse.(See "Asset/liability management.") OnApril 1, 2022 , we transferred certain securities AFS with an amortized cost and unrealized loss at the date of transfer of$418.1 million and$26.5 million , respectively to securities HTM. The transfer was made at fair value, with the unrealized loss becoming part of the purchase discount which will be accreted over the remaining life of the securities. The other comprehensive loss component is separated from the remaining available for sale securities and is accreted over the remaining life of the securities transferred. Based upon our liquidity and capital resources (as explained in more detail below under "Liquidity and capital resources"), we believe that we have the ability and intent to hold these securities until they mature, at which time we will receive full value for these securities. Securities Available for Sale Amortized Unrealized Fair Cost Gains Losses Value Securities available for sale (In thousands) March 31, 2023$ 839,927 $ 330 $ 72,731 $ 767,526 December 31, 2022 866,363 329 87,345 779,347 61
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Securities Held to Maturity
Transferred Unrealized
Carrying Unrealized Amortized
Value Loss (1) ACL Cost Gains Losses Fair Value
(In thousands)
Securities held to maturity
March 31, 2023 $ 369,577 $ 22,216 $ 160 $ 391,953 $ 108 $ 52,724 $ 339,337
December 31, 2022 374,818 23,066 168 398,052 11 62,645 335,418
(1)Represents the remaining unrealized loss to be accreted on securities that
were transferred from AFS to HTM on
Securities AFS in unrealized loss positions are evaluated quarterly for impairment related to credit losses. For securities AFS in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For securities AFS that do not meet this criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, adverse conditions specifically related to the security and the issuer and the impact of changes in market interest rates on the market value of the security, among other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an ACL is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income (loss), net of applicable taxes. No ACL for securities AFS was needed atMarch 31, 2023 . The decrease in unrealized losses during the first quarter of 2023 is primarily attributed to a decrease in interest rates sinceDecember 31, 2022 . See note #3 to the Condensed Consolidated Financial Statements included within this report for further discussion. For securities HTM an ACL is maintained at a level which represents our best estimate of expected credit losses. This ACL is a contra asset valuation account that is deducted from the carrying amount of securities HTM to present the net amount expected to be collected. Securities HTM are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in our Condensed Consolidated Statements of Operations in provision for credit loss. We measure expected credit losses on securities HTM on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard toU.S. Government -sponsored agency and mortgage-backed securities (residential and commercial), all these securities are issued by aU.S. government-sponsored entity and have an implicit or explicit government guarantee; therefore, no allowance for credit losses has been recorded for these securities. With regard to obligations of states and political subdivisions, private label-mortgage-backed, corporate and trust preferred securities HTM, we consider (1) issuer bond ratings, (2) long-term historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. During the first quarter of 2023, one corporate security (Signature Bank) defaulted resulting in a$3.0 million provision for credit losses and a corresponding full charge-off. Despite this lone security loss, the long-term historical loss rates associated with securities having similar grades as those in our portfolio have been insignificant. See note #3 to the Condensed Consolidated Financial Statements included within this report for further discussion. 62
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Sales of securities were as follows (See "Non-interest income."):
Sales of Securities
Three Months Ended March 31,
2023 2022
(In thousands)
Proceeds $ 278 $ 4,395
Gross gains - 70
Gross losses 222 -
Net gains (losses) $ (222) $ 70
Portfolio Loans and asset quality. In addition to the communities served by our
Bank branch and loan production office network, our principal lending markets
also include nearby communities and metropolitan areas. Subject to established
underwriting criteria, we also may participate in commercial lending
transactions with certain non-affiliated banks and make whole loan purchases
from other financial institutions.
The senior management and board of directors of our Bank retain authority and
responsibility for credit decisions and we have adopted uniform underwriting
standards. Our loan committee structure and the loan review process attempt to
provide requisite controls and promote compliance with such established
underwriting standards. However, there can be no assurance that our lending
procedures and the use of uniform underwriting standards will prevent us from
incurring significant credit losses in our lending activities.
We generally retain loans that may be profitably funded within established risk
parameters. (See "Asset/liability management.") As a result, we may hold
adjustable-rate and fixed rate jumbo mortgage loans as Portfolio Loans, while
15- and 30-year fixed-rate non-jumbo mortgage loans are generally sold to
mitigate exposure to changes in interest rates. (See "Non-interest income.") The
retention of newly originated fixed rate jumbo mortgage loans has declined
relative to the prior year as the growth in mortgage loans during the first
quarter of 2023 has primarily been attributed to the origination of
adjustable-rate mortgage loans as well as the continued advances on legacy fixed
rate construction mortgage loans. (See "Asset/liability management.").
A summary of our Portfolio Loans follows:
March 31, December 31,
2023 2022
(In thousands)
Real estate(1)
Residential first mortgages $ 1,125,509 $ 1,081,359 Residential home equity and other junior mortgages 149,283 138,944 Construction and land development
272,568 319,157
Other(2) 906,613 874,019
Consumer 624,258 624,047
Commercial 427,128 423,055
Agricultural 4,450 4,771
Total loans $ 3,509,809 $ 3,465,352 _________________________________
(1)Includes both residential and non-residential commercial loans secured by
real estate.
(2)Includes loans secured by multi-family residential and non-farm,
non-residential property.
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Non-performing assets
March 31, December 31,
2023 2022
(Dollars in thousands)
Non-accrual loans $ 6,216 $ 5,381
Loans 90 days or more past due and still accruing interest - -
Subtotal 6,216 5,381
Less: Government guaranteed loans 2,330 1,660
Total non-performing loans 3,886 3,721
Other real estate and repossessed assets 499 455
Total non-performing assets $
4,385
As a percent of Portfolio Loans Non-performing loans 0.11 % 0.11 % Allowance for credit losses 1.44 1.51 Non-performing assets to total assets 0.09 0.08
Allowance for credit losses as a percent of non-performing loans 1300.82 %
1409.16
Non-performing loans have remained relatively stable since year-end 2022, reflecting generally improving economic conditions and our ongoing collection efforts. Our collection and resolution efforts have generally resulted in a positive trend in non-performing loans.
Other real estate and repossessed assets totaled
We will place a loan that is 90 days or more past due on non-accrual, unless we believe the loan is both well secured and in the process of collection. Accordingly, we have determined that the collection of the accrued and unpaid interest on any loans that are 90 days or more past due and still accruing interest is probable.
The following tables reflect activity in our ACL on loans, securities and unfunded lending commitments as well as the allocation of our ACL on loans.
Allowance for credit losses on loans and unfunded lending commitments
Three months ended March 31,
2023 2022
Unfunded Unfunded
Loans Securities Commitments Loans Securities Commitments
(Dollars in thousands)
Balance at beginning of period $ 52,435 $ 168 $
5,080
(832) 2,992 - (1,573) - -
Recoveries credited to
allowance 578 - - 621 - -
Assets charged against the
allowance (1,631) (3,000) - (673) - -
Additions included in
non-interest expense - - (475) - - (355)
Balance at end of period
4,605
Net loans charged (recovered)
against the allowance to
average Portfolio Loans 0.12 % 0.01 %
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Allocation of the Allowance for Credit Losses on Loans
March 31, December 31,
2023 2022
(Dollars in thousands)
Specific allocations $ 874 $ 2,078
Pooled analysis allocations 36,826 37,662
Additional allocations based on subjective factors 12,850 12,695
Total $ 50,550 $ 52,435
Some loans will not be repaid in full. Therefore, an ACL on loans is maintained
at a level which represents our best estimate of expected credit losses. Our ACL
on loans is comprised of three principal elements: (i) specific analysis of
individual loans identified during the review of the loan portfolio, (ii) pooled
analysis of loans with similar risk characteristics based on historical
experience, adjusted for current conditions, reasonable and supportable
forecasts, and expected prepayments, and (iii) additional allowances based on
subjective factors, including local and general economic business factors and
trends, portfolio concentrations and changes in the size and/or the general
terms of the loan portfolios. See note #4 to the Condensed Consolidated
Financial Statements included within this report for further discussion on the
ACL on loans.
While we use relevant information to recognize losses on loans, additional provisions for related losses may be necessary based on changes in economic conditions, customer circumstances and other credit risk factors.
The ACL decreased
SinceDecember 31, 2022 , the ACL related to specific loans decreased$1.2 million due primarily to one commercial loan that was partially charged-off during the first quarter. The ACL related to pooled analysis of loans decreased$0.8 million due primarily to a decline in the expected duration of the mortgage loan portfolio. The ACL related to subjective factors increased modestly reflecting loan growth during the first quarter. Deposits and borrowings. Historically, the loyalty of our customer base has allowed us to price deposits competitively, contributing to a net interest margin that generally compares favorably to our peers. However, we still face a significant amount of competition for deposits within many of the markets served by our branch network, which limits our ability to materially increase deposits without adversely impacting the weighted-average cost of core deposits. To attract new core deposits, we have implemented various account acquisition strategies as well as branch staff sales training. Account acquisition initiatives have historically generated increases in customer relationships. Over the past several years, we have also expanded our treasury management products and services for commercial businesses and municipalities or other governmental units and have also increased our sales calling efforts in order to attract additional deposit relationships from these sectors. We view long-term core deposit growth as an important objective. Core deposits generally provide a more stable and lower cost source of funds than alternative sources such as short-term borrowings. (See "Liquidity and capital resources.") Deposits totaled$4.54 billion and$4.38 billion atMarch 31, 2023 , andDecember 31, 2022 , respectively. The increase in deposits is primarily due to growth in reciprocal deposits, time deposits and brokered time deposits that were partially offset by a decrease in non-interest bearing deposits. Reciprocal deposits totaled$685.5 million and$602.6 million atMarch 31, 2023 andDecember 31, 2022 , respectively. These deposits represent demand, money market and time deposits from our customers that have been placed through IntraFi Network. This service allows our customers to access multi-million dollarFDIC deposit insurance on deposit balances greater than the standardFDIC insurance maximum. We cannot be sure that we will be able to maintain our current level of core deposits. In particular, those deposits that are uninsured may be susceptible to outflow. Data relating to our our deposit portfolios (excluding brokered time) follows: 65
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March 31, December 31,
2023 2022
(Dollars in thousands)
Uninsured deposits $ 964,927 $ 975,938
Uninsured deposits as a percentage of deposits 22.6 % 23.4 %
Average deposit account size $ 19.63 $ 16.33
Balance of top 100 largest depositors $ 835,879 $ 752,924
Balance of top 100 depositors as a percentage of deposits 19.6 % 18.1 %
We have also implemented strategies that incorporate using federal funds
purchased, other borrowings and Brokered CDs to fund a portion of our
interest-earning assets. The use of such alternate sources of funds supplements
our core deposits and is also an integral part of our asset/liability management
efforts.
Other borrowings, comprised primarily of FRB and FHLB borrowings, totaled
As described above, we have utilized wholesale funding, including federal funds purchased, FHLB and FRB borrowings and Brokered CDs to augment our core deposits and fund a portion of our assets. AtMarch 31, 2023 , our use of such wholesale funding sources (including reciprocal deposits) amounted to approximately$1.02 billion , or 22.2% of total funding (deposits and all borrowings, excluding subordinated debt and debentures). Because wholesale funding sources are affected by general market conditions, the availability of such funding may be dependent on the confidence these sources have in our financial condition and operations. The continued availability to us of these funding sources is not certain, and Brokered CDs may be difficult for us to retain or replace at attractive rates as they mature. Our liquidity may be constrained if we are unable to renew our wholesale funding sources or if adequate financing is not available in the future at acceptable rates of interest or at all. Our financial performance could also be affected if we are unable to maintain our access to funding sources or if we are required to rely more heavily on more expensive funding sources. In such case, our net interest income and results of operations could be adversely affected. We historically employed derivative financial instruments to manage our exposure to changes in interest rates. During the first three months of 2023 and 2022, we entered into$19.5 million and$11.2 million (aggregate notional amounts), respectively, of interest rate swaps with commercial loan customers, which were offset with interest rate swaps that the Bank entered into with a broker-dealer. We recorded$0.4 million and$0.2 million of fee income related to these transactions during the first three months of 2023 and 2022, respectively. See note #6 to the Condensed Consolidated Financial Statements included within this report for more information on our derivative financial instruments. Liquidity and capital resources. Liquidity risk is the risk of being unable to timely meet obligations as they come due at a reasonable funding cost or without incurring unacceptable losses. Our liquidity management involves the measurement and monitoring of a variety of sources and uses of funds. Our Condensed Consolidated Statements of Cash Flows categorize these sources and uses into operating, investing and financing activities. We primarily focus our liquidity management on maintaining adequate levels of liquid assets (primarily funds on deposit with the FRB and certain securities AFS) as well as developing access to a variety of borrowing sources to supplement our deposit gathering activities and provide funds for purchasing securities or originating Portfolio Loans as well as to be able to respond to unforeseen liquidity needs. Our primary sources of funds include our deposit base, secured advances from the FHLB and FRB, federal funds purchased borrowing facilities with other banks, and access to the capital markets (for Brokered CDs). AtMarch 31, 2023 , in addition to liquidity available from our normal operating, funding and investing activities we had unused credit lines with the FHLB and FRB of approximately$930.1 million and$502.7 million , respectively. We also had approximately$928.5 million in fair value of unpledged securities AFS and HTM atMarch 31, 2023 , which could be pledged for an estimated additional borrowing capacity at the FHLB and FRB of approximately$854.9 million . AtMarch 31, 2023 , we had$696.8 million of time deposits that mature in the next 12 months. Historically, a majority of these maturing time deposits are renewed by our customers. Additionally,$3.78 billion of our deposits atMarch 31, 2023 , were in account types from which the customer could withdraw the funds on demand. Changes in the balances of deposits that can be withdrawn upon demand are usually predictable and the total balances of these accounts have generally grown or have been stable over time as a result of our marketing and promotional activities. However, there can be no assurance that historical patterns of renewing time deposits or overall growth or stability in deposits will continue in the future. 66
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Index
We have developed contingency funding plans that stress test our liquidity needs that may arise from certain events such as an adverse change in our financial metrics (for example, credit quality or regulatory capital ratios). Our liquidity management also includes periodic monitoring that measures quick assets (defined generally as highly liquid or short-term assets) to total assets, short-term liability dependence and basic surplus (defined as quick assets less volatile liabilities to total assets). Policy limits have been established for our various liquidity measurements and are monitored on a quarterly basis. In addition, we also prepare cash flow forecasts that include a variety of different scenarios.
We believe that we currently have adequate liquidity at our Bank because of our cash and cash equivalents, our portfolio of securities AFS, our access to secured advances from the FHLB and FRB and our ability to issue Brokered CDs.
We also believe that the available cash on hand at the parent company (including time deposits) of approximately$50.7 million as ofMarch 31, 2023 , provides sufficient liquidity resources at the parent company to meet operating expenses, to make interest payments on the subordinated debt and debentures, and, along with dividends from the Bank, to pay projected cash dividends on our common stock. Effective management of capital resources is critical to our mission to create value for our shareholders. In addition to common stock, our capital structure also currently includes subordinated debt and cumulative trust preferred securities.
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