NORTHWEST BANCSHARES, INC. 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;
• the disruption to local, regional, national and global economic activity caused by infectious disease outbreaks, including the outbreak of coronavirus (COVID-19) and the significant impact that such outbreak has had and may continue to have on our growth, operations and earnings;
• changes in asset quality, including increases in default rates on loans and higher levels of nonperforming loans and loan charge-offs generally;
• changes in laws or government regulations or policies affecting financial insitutions, including changes in regulatory fees and capital requirements;
• changes in 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 service charges and fees;
• our ability to enter new markets successfully and capitalize on growth opportunities;
• our ability to manage our internal growth and our ability to successfully integrate acquired entities, businesses or branch offices;
• changes in consumer spending, borrowing and savings habits;
• our ability to continue to increase and manage our commercial and personal loans;
• possible impairments of securities held by us, including those issued by government entities and government sponsored enterprises;
• the impact of the economy on our loan portfolio (including cash flow and collateral values), investment portfolio, customers and capital market activities;
• our ability to receive regulatory approvals for proposed transactions or new lines of business;
• the effects of any federal government shutdown or the inability of the federal government to manage debt limits;
• changes in the financial performance and/or condition of our borrowers;
• the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as theSecurities and Exchange Commission , thePublic Company Accounting Oversight Board , theFinancial 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; • our ability to retain key employees; and
• our compensation expense associated with equity allocated or awards to our employees.
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Table of Contents
Overview of Critical Accounting Policies Involving Estimates
Please refer to Note 1 of the Notes to Consolidated Financial Statements in Item 8 of Part II of our 2022 Annual Report on Form 10-K.
Recently Issued Accounting Standards
The following accounting standard updates issued by the FASB have not yet been adopted.
InMarch 2020 , the FASB issued Accounting Standards Update ("ASU") No. 2020-04, "Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This ASU provides temporary optional guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. The guidance provides expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The amendments primarily include contract modifications and hedge accounting, as well as providing a one-time election for the sale or transfer of debt securities classified as held-to-maturity. This guidance was effective as ofMarch 12, 2020 throughDecember 31, 2022 . InDecember 2022 , the FASB issued ASU No. 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date to Topic 848". This guidance extends the guidance of ASU 2022-04 fromDecember 31, 2022 toDecember 31, 2024 . InJanuary 2021 , the FASB issued ASU No. 2021-01, "Reference Rate Reform." This ASU provides amendments, which are elective, and apply to all entities that have derivative instruments that use an interest rate for margining, discounting or contract price alignment of certain derivative instruments that are modified as a result of the reference rate reform. We established a cross-functional working group to manage the LIBOR transition. A transition plan was created to identify and modify the Company's loan and other financial instrument contracts that are impacted by LIBOR transition. The Company chose the Secured Overnight Financing Rate ("SOFR") as its alternative replacement for LIBOR on both back-to-back swaps and variable rate loans. We have not offered LIBOR for any new contracts sinceDecember 31, 2021 . We are continuing to evaluate the amendments on our financial statements, with no material impacts expected, and execute on our transition plan.
Comparison of Financial Condition
Total assets at
Total cash and cash equivalents decreased by
Total marketable securities decreased by
Gross loans receivable increased by$171.8 million , or 1.6%, to$11.092 billion atMarch 31, 2023 , from$10.920 billion atDecember 31, 2022 . This increase was attributable to organic loan growth. Our commercial and industrial (C&I) loan portfolio increased by$114.1 million , or 10.1%, to$1.246 billion atMarch 31, 2023 , from$1.132 billion atDecember 31, 2022 , and our consumer portfolio, comprised primarily of indirect automobile loans, increased by$63.5 million , or 2.9%, to$2.232 billion atMarch 31, 2023 compared to$2.169 billion atDecember 31, 2022 . Total deposits increased by$72.6 million , or 0.6%, to$11.537 billion atMarch 31, 2023 from$11.465 billion atDecember 31, 2022 . This increase was primarily driven by a$524.5 million , or 49.8%, increase in time deposits due to customer preferences for this fixed maturity product in a higher interest rate environment. Partially offsetting this increase were decreases in demand deposit accounts of$242.1 million , or 4.3%, as we believe customers used funds during the period of higher inflationary costs. In addition, savings and money market deposits decreased by$209.8 million , or 4.4%, due to customers choosing higher yielding product alternatives. Total shareholders' equity atMarch 31, 2023 was$1.513 billion , or$11.91 per share, an increase of$21.8 million , or 1.5%, from$1.491 billion , or$11.74 per share, atDecember 31, 2022 . This increase was the result of quarterly earnings of$33.7 million , as well as a decrease in accumulated other comprehensive loss of$12.6 million due to a decrease in unrealized losses in the available-for-sale investment portfolio as a result of the current rate environment. These increases were partially offset by a$25.4 million payment of cash dividends. 39 -------------------------------------------------------------------------------- Table of Contents Regulatory Capital Financial institutions and their holding companies are subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct, material effect on a company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, financial institutions must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting guidelines. Capital amounts and classifications are also subject to qualitative judgments made by the regulators about components, risk-weighting and other factors. Applicable rules limit an organization's capital distributions and certain discretionary bonus payments if the organization does not hold a "capital conservation buffer" consisting of 2.5% of Total, Tier 1 and Common Equity Tier 1 ("CET1") capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. Quantitative measures, established by regulation to ensure capital adequacy, require financial institutions to maintain minimum amounts and ratios (set forth in the table below) of Total, CET1 and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Capital requirements are presented in the tables below (in thousands). At March 31, 2023 Actual Minimum capital requirements (1) Well capitalized
requirements
Amount Ratio Amount Ratio Amount Ratio
Total capital (to risk weighted assets) Northwest Bancshares, Inc.$ 1,759,983 16.399 %$ 1,126,866 10.500 %$ 1,073,206 10.000 % Northwest Bank 1,468,316 13.695 % 1,125,772 10.500 % 1,072,164 10.000 % Tier 1 capital (to risk weighted assets) Northwest Bancshares, Inc. 1,522,196 14.184 % 912,225 8.500 % 858,565 8.000 % Northwest Bank 1,344,457 12.540 % 911,339 8.500 % 857,731 8.000 % CET1 capital (to risk weighted assets) Northwest Bancshares, Inc. 1,396,806 13.015 % 751,244 7.000 % 697,584 6.500 % Northwest Bank 1,344,457 12.540 % 750,515 7.000 % 696,907 6.500 % Tier 1 capital (leverage) (to average assets) Northwest Bancshares, Inc. 1,522,196 10.774 % 565,117 4.000 % 706,397 5.000 % Northwest Bank 1,344,457 9.520 % 564,912 4.000 % 706,140 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.$ 1,682,487 17.056 %$ 1,035,786 10.500 %$ 986,463 10.000 % Northwest Bank 1,551,084 15.738 % 1,034,819 10.500 % 985,542 10.000 % Tier I capital (to risk weighted assets) Northwest Bancshares, Inc. 1,475,190 14.954 % 838,494 8.500 % 789,170 8.000 % Northwest Bank 1,467,362 14.889 % 837,711 8.500 % 788,434 8.000 % CET1 capital (to risk weighted assets) Northwest Bancshares, Inc. 1,350,125 13.687 % 690,524 7.000 % 641,201 6.500 % Northwest Bank 1,467,362 14.889 % 689,879 7.000 % 640,602 6.500 % Tier I capital (leverage) (to average assets) Northwest Bancshares, Inc. 1,475,190 10.349 % 570,160 4.000 % 712,699 5.000 % Northwest Bank 1,467,362 10.296 % 570,047 4.000 % 712,558 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).
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Table of Contents
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 March 31,
2023 was 10.71%. We adjust liquidity levels in order to meet funding needs for
deposit outflows, payment of real estate taxes and insurance on mortgage loan
escrow accounts, repayment of borrowings and loan commitments. At March 31,
2023 , Northwest had $3.041 billion of additional borrowing capacity available
with the FHLB, including $250.0 million on an overnight line of credit which had
a drawn balance of $183.7 million at March 31, 2023 , as well as $304.6 million
of borrowing capacity available with the Federal Reserve Bank and $105.0 million
with two correspondent banks.
Dividends
We paid $25.4 million and $25.3 million in cash dividends during the quarters
ended March 31, 2023 and 2022, respectively. The common stock dividend payout
ratio (dividends declared per share divided by net income per diluted share) was
76.9% and 90.9% for the quarters ended March 31, 2023 and March 31, 2022 ,
respectively, on dividends of $0.20 per share. On April 19, 2023 , the Board of
Directors declared a cash dividend of $0.20 per share payable on May 15, 2023 to
shareholders of record as of May 4, 2023 . This represents the 114th 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.
March 31, 2023 December 31, 2022
(in thousands)
Loans 90 days or more past due:
Residential mortgage loans $ 3,300 5,574
Home equity loans 2,190 2,257
Vehicle loans 2,622 2,471
Other consumer loans 657 608
Commercial real estate loans 7,804 7,589
Commercial real estate - owner occupied 206 278
Commercial loans 1,302 1,829
Total loans 90 days or more past due $ 18,081 20,606
Total real estate owned (REO) $ 524 413
Total loans 90 days or more past due and REO 18,605 21,019
Total loans 90 days or more past due to net loans receivable 0.16 % 0.19 %
Total loans 90 days or more past due and REO to total assets 0.13 % 0.15 %
Nonperforming assets:
Nonaccrual loans - loans 90 days or more past due $ 17,430 19,861
Nonaccrual loans - loans less than 90 days past due 61,179 61,375
Loans 90 days or more past due still accruing 652 744
Total nonperforming loans 79,261 81,980
Total nonperforming assets $ 79,785 82,393
Total nonaccrual loans to total loans 0.71 % 0.74 %
41-------------------------------------------------------------------------------- Table of Contents Allowance for Credit Losses On an ongoing basis, theCredit Administration department, as well as loan officers, branch managers and department heads, review and monitor the loan portfolio for problem loans. This portfolio monitoring includes a review of the monthly delinquency reports as well as historical comparisons and trend analysis. Personal and small business commercial loans are classified primarily by delinquency status. In addition, a meeting is held every quarter with each region to monitor the performance and status of commercial loans on an internal watch list. On an on-going basis, the loan officer, in conjunction with a portfolio manager, grades or classifies problem commercial loans or potential problem commercial loans based upon their knowledge of the lending relationship and other information previously accumulated. This rating is also reviewed independently by our Loan Review department on a periodic basis. Our loan grading system for problem commercial loans is consistent with industry regulatory guidelines which classifies loans as "substandard", "doubtful" or "loss". Loans that do not expose us to risk sufficient to warrant classification in one of the previous categories, but which possess some weaknesses, are designated as "special mention". A "substandard" loan is any loan that is 90 days or more contractually delinquent or is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as "doubtful" have all the weaknesses inherent in those classified as "substandard" with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions or values, highly questionable and improbable. Loans classified as "loss" have all the weakness inherent in those classified as "doubtful" and are considered uncollectible. Credit relationships that have been classified as substandard or doubtful and are greater than or equal to$1.0 million are reviewed by theCredit 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, theCredit 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, theCredit 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 inOctober 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 theFDIC and/or thePennsylvania 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. 42 -------------------------------------------------------------------------------- Table of Contents 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 ofMarch 31, 2023 , we considered the most recent economic conditions and forecasts available which incorporated the impact of material recent economic events. In addition, we considered the overall trends in asset quality, reserves on individually assessed loans, historical loss rates and collateral valuations. The ACL increased by$3.2 million , or 2.7%, to$121.3 million , or 1.09% of total loans atMarch 31, 2023 from$118.0 million , or 1.08% of total loans, atDecember 31, 2022 . This increase was the result of continued deterioration in economic forecasts as well as organic loan growth. Total classified loans decreased$27.6 million , or 11.7%, to$208.6 million atMarch 31, 2023 from$236.2 million atDecember 31, 2022 . This decrease was primarily driven by upgrades and payoffs of loans in our commercial real estate portfolio during the current quarter. We also consider how the levels of nonaccrual loans and historical charge-offs have influenced the required amount of allowance for credit losses. Nonaccrual loans of$78.6 million , or 0.71% of total loans receivable atMarch 31, 2023 , decreased by$2.6 million , or 3.2%, from$81.2 million , or 0.74% of total loans receivable atDecember 31, 2022 . This decrease was primarily related to upgrades of loans within our commercial real estate portfolio. As a percentage of average loans, annualized net charge-offs increased to 0.08% for the quarter endedMarch 31, 2023 compared to 0.02% for the year endedDecember 31, 2022 due to several large recoveries during 2022.
Comparison of Operating Results for the Quarters Ended
Net income for the quarter endedMarch 31, 2023 was$33.7 million , or$0.26 per diluted share, an increase of$5.4 million , or 19.1%, from net income of$28.3 million , or$0.22 per diluted share, for the quarter endedMarch 31, 2022 . The increase in net income resulted primarily from an increase in net interest income of$21.8 million , or 24.1%, partially offset by increases in noninterest expense, the provision for credit losses, and the provision for income tax expense. Noninterest expense increased$7.1 million , or 8.8%, the provision for credit losses increased$4.9 million , and the provision for income tax expense increased$2.7 million , or 35.4%. Additionally, noninterest income decreased$1.8 million , or 6.9%. Net income for the quarter endedMarch 31, 2023 represents annualized returns on average equity and average assets of 9.11% and 0.97%, respectively, compared to 7.17% and 0.80% for the same quarter last year. A further discussion of notable changes follows.
Interest Income
Total interest income increased$38.5 million , or 39.9%, to$134.9 million for the quarter endedMarch 31, 2023 from$96.4 million for the quarter endedMarch 31, 2022 . This increase is attributable to an increase in the average yield earned on interest-earning assets as well as the change in our interest-earning asset mix. The average yield earned on interest-earning assets increased to 4.13% for the quarter endedMarch 31, 2023 from 2.91% for the quarter endedMarch 31, 2022 due to the continued rising interest rate environment. This was partially offset by a decline in the average balance of interest-earning assets of$198.6 million , or 1.5%, to$13.252 billion for the quarter endedMarch 31, 2023 from$13.450 billion for the quarter endedMarch 31, 2022 , primarily driven by a decrease in other interest-earning deposits, offset by an increase in the average balance of loans receivable, described further below. Interest income on loans receivable increased by$35.6 million , or 40.3%, to$123.7 million for the quarter endedMarch 31, 2023 compared to$88.2 million for the quarter endedMarch 31, 2022 . This increase in interest income was the result of increases in both the average yield on loans receivable and the average balance of loans receivable. The average yield on loans receivable increased to 4.61% for the quarter endedMarch 31, 2023 from 3.61% for the quarter endedMarch 31, 2022 , due to the increase in market interest rates. Additionally, the average balance of loans receivable increased$988.3 million , or 10.0%, to$10.887 billion for the quarter endedMarch 31, 2023 from$9.899 billion for the quarter endedMarch 31, 2022 , due to organic loan growth in our retail portfolio. Additionally contributing to loan growth were purchases of loan pools during 2022, including$182.8 million in small business equipment finance loans and$188.3 million of one- to four-family jumbo mortgage loans. Interest income on mortgage-backed securities increased by$2.2 million , or 34.2%, to$8.5 million for the quarter endedMarch 31, 2023 compared to$6.4 million for the quarter endedMarch 31, 2022 . This increase was driven by an increase in the average yield on mortgage-backed securities to 1.79% for the quarter endedMarch 31, 2023 from 1.31% for the quarter endedMarch 31, 2022 due to the purchase of higher yielding mortgage-backed securities in the prior year. This increase in the average yield was offset slightly by a$35.5 million , or 1.8%, decrease in the average balance of mortgage-backed securities to$1.910 billion for the quarter endedMarch 31, 2023 from$1.945 billion for the quarter endedMarch 31, 2022 due to regular payments and maturities. Interest income on investment securities increased by$194,000 , or 14.4%, to$1.5 million for the quarter endedMarch 31, 2023 from$1.4 million for the quarter endedMarch 31, 2022 . This increase was attributable to increases in both the average yield and average balance of investment securities. The average yield on investment securities increased to 1.61% for the quarter ended 43 -------------------------------------------------------------------------------- Table of ContentsMarch 31, 2023 from 1.45% for the quarter endedMarch 31, 2022 . In addition, the average balance increased by$11.0 million , or 2.9%, to$384.7 million for the quarter endedMarch 31, 2023 from$373.7 million for the quarter endedMarch 31, 2022 . Dividends on FHLB stock increased by$609,000 , or 751.9%, to$690,000 for the quarter endedMarch 31, 2023 from$81,000 for the quarter endedMarch 31, 2022 . This increase was due to the increase in the average balance of FHLB stock of$25.8 million , or 185.7%, to$39.6 million for the quarter endedMarch 31, 2023 from$13.9 million for the quarter endedMarch 31, 2022 . Required FHLB stock holdings fluctuate with, among other things, the utilization of our borrowing capacity as well as capital requirements established by the FHLB. In addition, the average yield increased to 7.06% for the quarter endedMarch 31, 2023 from 2.38% for the quarter endedMarch 31, 2022 due to increases in market interest rates. Interest income on interest-earning deposits decreased by$44,000 , or 9.4%, to$423,000 for the quarter endedMarch 31, 2023 from$467,000 for the quarter endedMarch 31, 2022 . The average balance of interest-earning deposits decreased by$1.188 billion , or 97.5%, to$30.8 million for the quarter endedMarch 31, 2023 from$1.219 billion for the quarter endedMarch 31, 2022 as the Bank redeployed these funds into higher yielding loans and investments. Offsetting this decrease in average balance was an increase in the average yield on interest-earning deposits to 5.50% for the quarter endedMarch 31, 2023 from 0.15% for the quarter endedMarch 31, 2022 , due to the aggressive campaign by theFederal Reserve Board over the last year to raise targeted short-term interest rates to combat inflation.
Interest Expense
Interest expense increased by$16.7 million , or 286.9%, to$22.5 million for the quarter endedMarch 31, 2023 from$5.8 million for the quarter endedMarch 31, 2022 due to the increase in the average cost of interest-bearing liabilities to 0.96% for the quarter endedMarch 31, 2023 from 0.25% for the quarter endedMarch 31, 2022 . This increase in cost of funds was primarily attributable to increases in the interest rates paid on borrowed funds and deposit accounts in response to increases in market interest rates as well as a change in mix to higher funding cost products. Partially offsetting this increase was a decrease in the average balance of interest-bearing liabilities of$61.1 million , or 0.64%, to$9.497 billion for the quarter endedMarch 31, 2023 from$9.559 billion for the quarter endedMarch 31, 2022 . This decrease in average balance was driven by a decrease in average deposits by$656.6 million , or 7.2%, as we believe customers used funds during a period of higher inflationary costs and searched for higher alternative yields. The decrease in the average deposit balance was funded by an increase in average borrowed funds by$604.9 million .
Net Interest Income
Net interest income increased by$21.8 million , or 24.1%, to$112.5 million for the quarter endedMarch 31, 2023 from$90.6 million for the quarter endedMarch 31, 2022 . This increase is attributable to the factors discussed above. Our interest rate spread increased to 3.17% for the quarter endedMarch 31, 2023 from 2.66% for the quarter endedMarch 31, 2022 and our net interest margin increased to 3.44% for the quarter endedMarch 31, 2023 from 2.73% for the quarter endedMarch 31, 2022 due to the change in market rates as well as the change in our interest-earning asset mix.
Provision for Credit Losses
The provision for credit losses increased by$4.9 million to$5.0 million for the quarter endedMarch 31, 2023 compared to$115,000 for the quarter endedMarch 31, 2022 . The current period provision for credit losses includes$4.9 million for credit losses - loans and$126,000 for credit losses - unfunded commitments. The prior period provision for credit losses included a credit of$1.5 million for credit losses - loans and$1.6 million for credit losses - unfunded commitments. The$6.4 million increase in the provision for credit losses - loans was driven by continued growth within our loan portfolio, as well as forecasted economic deterioration reflected in our allowance for credit loss models. This was partially offset by a$1.5 million decrease in our provision for credit losses - unfunded commitments compared to the same quarter last year based on the timing of the origination of loans with current off-balance sheet exposure. As noted above, the Company continued to experience improvement in asset quality as total classified loans decreased by$111.3 million , or 34.8%, to$208.6 million atMarch 31, 2023 from$319.9 million atMarch 31, 2022 resulting primarily from upgrades and payoffs within our commercial real estate portfolio. In determining the amount of the current period provision, we considered current 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 atMarch 31, 2023 . 44 -------------------------------------------------------------------------------- Table of Contents Noninterest Income Noninterest income decreased by$1.8 million , or 6.9%, to$24.0 million for the quarter endedMarch 31, 2023 from$25.7 million for the quarter endedMarch 31, 2022 . This decrease was primarily due to a decrease in mortgage banking income of$941,000 , or 64.2%, to$524,000 for the quarter endedMarch 31, 2023 from$1.5 million for the quarter endedMarch 31, 2022 due to the volatile interest rate environment causing less favorable pricing in the secondary market, as well as a decrease in mortgage volumes primarily due to higher market interest rates. In addition, income from bank-owned life insurance decreased$714,000 , or 36.0%, to$1.3 million for the quarter endedMarch 31, 2023 from$2.0 million for the quarter endedMarch 31, 2022 due to death benefits received in the prior year.
Noninterest Expense
Noninterest expense increased by$7.1 million , or 8.8%, to$87.5 million for the quarter endedMarch 31, 2023 from$80.3 million for the quarter endedMarch 31, 2022 . This increase was attributable to increases in professional services, processing expenses, acquisition expense, and federal deposit insurance premiums. Professional services increased$2.2 million , or 84.9%, to$4.8 million for the quarter endedMarch 31, 2023 from$2.6 million for the quarter endedMarch 31, 2022 due to the use of third-party consulting and staffing support. Processing expenses increased$1.8 million , or 14.4%, to$14.4 million for the quarter endedMarch 31, 2023 from$12.5 million for the quarter endedMarch 31, 2022 due to the implementation of additional third party software programs. Merger, asset disposition, and restructuring expense increased$1.4 million , or 103.9%, to$2.8 million for the quarter endedMarch 31, 2023 from$1.4 million for the quarter endedMarch 31, 2022 due to the severance and fixed asset charges related to the branch optimization and personnel reduction announced during the fourth quarter of 2022. Lastly,FDIC insurance premiums increased$1.1 million , or 96.9%, to$2.2 million for the quarter endedMarch 31, 2023 from$1.1 million for the quarter endedMarch 31, 2022 due to an increase in the deposit insurance assessment rate beginning in the first quarter of 2023. Income Taxes The provision for income taxes increased by$2.7 million , or 35.4%, to$10.3 million for the quarter endedMarch 31, 2023 from$7.6 million for the quarter endedMarch 31, 2022 . This increase in income taxes was due to an increase in income before taxes in the current year. We anticipate our effective tax rate to be between 22.5% and 24.5% for the year endingDecember 31, 2023 . 45
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Table of Contents
Average Balance Sheet
(in thousands)
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on interest-earning assets
and average cost of interest-bearing liabilities for the periods indicated. Such
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods
presented. Average balances are calculated using daily averages.
Quarter ended March 31,
2023 2022
Avg. Avg.
Average yield/ Average yield/
balance Interest cost (h) balance Interest cost (h)
Assets
Interest-earning assets: Residential mortgage loans$ 3,493,617 32,009 3.66 %$ 2,980,788 25,542 3.43 % Home equity loans 1,284,425 16,134 5.09 % 1,293,986 11,472 3.60 % Consumer loans 2,123,672 20,794 3.97 % 1,799,037 14,907 3.36 % Commercial real estate loans 2,824,120 37,031 5.24 % 3,000,204 29,757 3.97 % Commercial loans 1,161,298 18,353 6.32 % 824,770 6,897 3.34 % Loans receivable (a) (b) (d) (includes FTE 10,887,132 124,321 4.63 % 9,898,785 88,575 3.63 % adjustments of$576 and$401 , respectively) Mortgage-backed securities (c) 1,909,676 8,537 1.79 % 1,945,173 6,360 1.31 % Investment securities (c) (d) (includes FTE 384,717 1,761 1.83 % 373,694 1,540 1.65 % adjustments of$216 and$189 , respectively) FHLB stock, at cost 39,631 690 7.06 % 13,870 81 2.38 % Other interest-earning deposits 30,774 423 5.50 % 1,218,960 467 0.15 % Total interest-earning assets (includes FTE 13,251,930 135,732 4.15 % 13,450,482 97,023 2.93 % adjustments of$792 and$590 , respectively) Noninterest-earning assets (e) 869,566 973,092 Total assets$ 14,121,496 $ 14,423,574 Liabilities and shareholders' equity Interest-bearing liabilities: Savings deposits (g)$ 2,198,988 690 0.13 %$ 2,334,494 592 0.10 % Interest-bearing demand deposits (g) 2,612,883 951 0.15 % 2,875,430 321 0.05 % Money market deposit accounts (g) 2,408,582 4,403 0.74 % 2,668,105 653 0.10 % Time deposits (g) 1,293,609 5,194 1.63 % 1,292,608 2,185 0.69 % Borrowed funds (f) 740,218 7,938 4.35 % 135,289 158 0.47 % Subordinated debentures 113,870 1,148 4.03 % 123,608 1,250 4.05 % Junior subordinated debentures 129,335 2,152 6.66 % 129,077 651 2.02 % Total interest-bearing liabilities 9,497,485 22,476 0.96 % 9,558,611 5,810 0.25 % Noninterest-bearing demand deposits (g) 2,889,973 3,060,698 Noninterest-bearing liabilities 235,213 203,537 Total liabilities 12,622,671 12,822,846 Shareholders' equity 1,498,825 1,600,728 Total liabilities and shareholders' equity$ 14,121,496 $ 14,423,574 Net interest income/Interest rate spread 113,256 3.19 % 91,213 2.68 % Net interest-earning assets/Net interest$ 3,754,445 3.47 %$ 3,891,871 2.75 %
margin
Ratio of interest-earning assets to 1.40X 1.41X
interest- bearing liabilities
(a)Average gross loans includes loans held as available-for-sale and loans
placed on nonaccrual status.
(b)Interest income includes accretion/amortization of deferred loan
fees/expenses, which were not material.
(c)Average balances do not include the effect of unrealized gains or losses on
securities held as available-for-sale.
(d)Interest income on tax-free investment securities and tax-free loans are
presented on a fully taxable equivalent ("FTE") basis.
(e)Average balances include the effect of unrealized gains or losses on
securities held as available-for-sale.
(f)Average balances include FHLB borrowings and collateralized borrowings.
(g)Average cost of deposits were 0.40% and 0.12%, respectively, average cost of
interest-bearing deposits were 0.54% and 0.17%, 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 - 4.61% and 3.61%, respectively; investment securities - 1.61% and
1.45%, respectively; interest-earning assets - 4.13% and 2.91%, respectively.
GAAP basis net interest rate spreads were 3.17% and 2.66%, respectively; and
GAAP basis net interest margins were 3.44% and 2.73%, 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
Increase/(decrease) due to Total
Rate Volume increase/(decrease)
Interest-earning assets:
Loans receivable $ 24,460 11,286 35,746
Mortgage-backed securities 2,336 (159) 2,177
Investment securities 171 50 221
FHLB stock, at cost 162 447 609
Other interest-earning deposits 16,286 (16,330) (44)
Total interest-earning assets 43,415 (4,706) 38,709
Interest-bearing liabilities:
Savings deposits 140 (42) 98
Interest-bearing demand deposits 726 (96) 630
Money market deposit accounts 4,224 (474) 3,750
Time deposits 3,005 4 3,009
Borrowed funds 1,294 6,486 7,780
Subordinated debt (5) (97) (102)
Junior subordinated debentures 1,497 4 1,501
Total interest-bearing liabilities 10,881 5,785 16,666
Net change in net interest income $ 32,534 (10,491) 22,043
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